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Yen Rises as Japan's Koizumi Wins Election and Affirms Policies

Nov. 10 (Bloomberg) -- The yen rose against the dollar and euro in New York trading after Prime Minister Junichiro Koizumi won re-election, pledging to maintain policies that have attracted international investment to Japan.

Japan's currency has gained 14 percent against the dollar since Koizumi was elected in April 2001. The prime minister, who has vowed to clean up more than $400 billion of bad loans stifling Japan's financial system, said he will keep his cabinet ``basically the same.'' His Liberal Democratic Party will merge with an ally, elevating the party to a majority in parliament.

``People are interpreting the election results as leading to a more pro-reform environment in Japan, which is why the yen is strengthening,'' said Parker King, a senior currency analyst at Putnam Investments in Boston, which manages $263 billion. ``That has to be good for their asset markets.''

The yen traded at 108.65 to the dollar, the highest this month, at 4 p.m. in New York, from 109.39 on Friday. It reached 107.88 earlier today, compared with its three-year low of 107.86 reached on Oct. 29. Against the euro, the yen rose to 124.78 from 126.09, the strongest since Jan. 16.

Koizumi's Liberal Democratic Party will hold 240 seats in the new parliament, he said at a press conference in Tokyo. The party is one seat shy of a majority and ahead of the opposition Democratic Party's 177. Joining with the New Conservative Party, a coalition partner, will give the LDP a three-seat majority.

``If the party can bolster their position by a merger, then that's bit of relief because the market would like to see Koizumi pressing ahead with reforms,'' said Sean Callow, senior currency strategist at research firm IDEAglobal in New York. The yen will probably strengthen to 105 yen per dollar by year-end, Callow said.

Initial Results

Initial election results showed the Liberal Democratic Party's majority in parliament was reduced, pushing the benchmark Nikkei-225 Stock Average down 1.2 percent by the close at 3 p.m. Tokyo time. Since then, losses by Koizumi's party were less than projected by television networks, reassuring strategists that his policies will remain intact.

Koizumi has been ``pushing reforms that should improve the structure of the economy and make it more efficient,'' said Peter Frank, senior foreign-exchange strategist at ABN Amro in Chicago. This is ``very good for the yen,'' and the election outcome ``backs up Koizumi's reform policies.''

The yen may strengthen to 106 per dollar by the end of January, which would be a three-year high, Frank said. International investors have been net buyers of Japanese stocks for 27 of the past 29 weeks. The benchmark Nikkei 225 Stock Average has added 28 percent in the past six months.

Bank of Japan

Japan's currency fell as low as 109.64 to the dollar in Asian trading after it was reported the LDP lost 12 seats, trimming its total number of seats to 275 and raising speculation Koizumi would have a harder time cleaning up banks' bad loans and reining in spending.

The election leaves the ruling coalition with 278 seats, including 34 held by New Komeito lawmakers, which is enough to ensure control of all key lower house committee posts. It's less than the 287 seats the coalition held before the poll.

``There's no question that the LDP retaining a majority is good news,'' said Jeremy Fand, senior proprietary currency trader in New York at WestLB AG. Japan's Ministry of Finance ``will allow the yen to strengthen, even though they will be nervous about the pace of its acceleration.''

Japan sold 2.72 trillion yen ($24.7 billion) from Sept. 27 to Oct. 29, the Ministry of Finance said last week, bringing the year-to-date sales to a record 16.2 trillion yen. The Bank of Japan buys and sells yen at the direction of the ministry.

U.S. Economy

The dollar rose against the euro for the third day in four on speculation economic growth in the U.S. will outpace that of the dozen nations sharing the euro. The dollar traded at $1.1484 per euro from $1.1525 per euro in New York on Friday, extending its 0.6 percent gain against Europe's currency last week.

The U.S. economy may expand at the fastest pace in six years in 2004, according to the average estimate of 51 economists surveyed by Blue Chip Economic Indicators. Gross domestic product in the U.S. rose at a 7.2 percent annual rate in the third quarter. The U.S. added 126,000 jobs in October, the Labor Department said on Friday, twice as many as the median forecast of economists surveyed by Bloomberg.

``The strength of the last two weeks of data has been immense,'' which is ``helpful for the dollar,'' said ABN Amro's Frank. ``You will see pretty significant inflows'' into U.S. dollar assets, he said.

`Lethargic' Growth

The U.S. currency may trade between $1.12 per euro and $1.13 per euro by the end of 2003, Frank said. Seventy-six percent of the 46 strategists, investors and traders polled by Bloomberg News on Friday from Tokyo to New York recommended buying or holding the dollar against the euro.

European government reports this week will show the economies of Germany, France and Italy barely growing, said analysts surveyed separately by Bloomberg News.

``Europe is bound to appear lethargic compared to the U.S. and Japan,'' WestLB's Fand said. ``The euro will probably weaken relative to almost every major currency. Japan has been in recession for almost 10 years -- if they can reverse that it will force'' the euro lower compared with the yen, he said.

The euro may weaken to as low as 110 yen per euro by the end of 2004, Fand said.

The dollar is still down 9.5 percent this year. George Soros, chairman of Soros Fund Management LLC, the world's biggest hedge fund group, last week said the dollar will continue to fall, as part of ``long swings'' in currency markets that typically last two to three years.