10/01 07:55 Yen Falls as Survey Shows Japanese Business Confidence Declines By John Beresford-Peirse

London, Oct. 1 (Bloomberg) -- The yen fell against the dollar and euro after a report showed Japanese business confidence had its steepest drop in 3 1/2 years, adding to evidence the second biggest economy is in recession.

The yen weakened to 119.68 per dollar from 119.12 Friday. Against the euro, it fell to 109.21 from 108.48. Japan's currency has shed 2.2 percent since Sept. 17, when the Bank of Japan began selling the yen to boost its shrinking economy. The sales pared the yen's gain against the dollar to 4.2 percent in the past three months.

``The Tankan and the threat the BOJ is still around has been a double hit for the yen,'' said Steve Barrow, a currency strategist at Bear Stearns International.

The central bank's quarterly Tankan index of 8,749 companies, considered the best gauge of business confidence in Japan, fell in the third quarter to its lowest level since June 1999. Japan's currency also dropped as traders speculated the central bank may sell its currency for an eighth time since mid- September.

Japan's economy is probably in recession for the fourth time in just over a decade. The economy shrank 0.8 percent in the second quarter from the first quarter, and probably contracted again in the following three-month period, satisfying the common definition of a recession, economists said.

``The fact Japan is in recession is beyond issue,'' said Bear Stearns' Barrow. ``It's just a question of the depth and how they get out of it.'' He expects the economy to contract 0.5 percent this year.

Selling Yen

The Japanese government has sold its currency seven times in the past two weeks in the hope a weaker yen will bolster exporters' earnings. Exporters generate a tenth of the country's economic output, and a cheaper yen makes Japanese products more competitive in overseas markets.

``The main question for the yen is how successful the BOJ's intervention will be,'' said Tony Spence, who helps oversee about $19 billion at First Quadrant Ltd.

While more Japanese investors may be tempted to bring funds home following the terrorist attacks on the U.S., strengthening the yen, the central bank ``will ultimately succeed'' in weakening it, he said.

The bank has probably spent between $20 billion and $25 billion in September trying to achieve that goal, according to ABN Amro.

Japan hasn't sold yen that frequently in as brief a span of time since April 1995, when the yen reached a postwar high of 79.75 per dollar amid speculation the U.S. trade deficit with Japan would prompt the U.S. to weaken its currency.

The yen will fall to 120.60 by the end of October on speculation the BOJ will take more steps to weaken its currency, a survey of eight bank and company analysts by Bloomberg News showed.

Weaker Yen

Japanese policy makers have few options besides weakening the currency to try to steer the second-biggest economy away from recession. Interest rates are already near zero, and government spending is constrained by debt amounting to about 130 percent of gross domestic product.

Haruhiko Kuroda, Japan's vice finance minister of international affairs, said today Japan's currency policy was unchanged.

``The BOJ will probably sell yen again should it rise above 118 against the dollar,'' said Masamichi Nomura, head of foreign-exchange trading at BNP Paribas SA in Tokyo.

The dollar was little changed at 91.27 cents per euro from 91.05 Friday before a report due at 3 p.m. London time that will probably show U.S. manufacturing activity contracted for a 14th consecutive month in September.

The National Association of Purchasing Management's factory index will probably show a reading of 45 for last month, down from 47.9 in August, according to the median of 33 forecasts in a Bloomberg News survey. Readings of less than 50 signal contraction.

Responses received both before and after Sept. 11 will be included in the survey, the NAPM said.

Analysts surveyed by Bloomberg News expect the Federal Reserve to lower its key rate to 2.5 percent from 3 percent tomorrow, taking it to the lowest level since 1962.

The economy, already weak, probably shrank in the just- ended third quarter and is likely to do so in the fourth after the Sept. 11 terrorist attacks depressed business and consumer spending, a separate survey by Bloomberg showed.

A half-percentage point cut may strengthen the dollar because the ``market is focused firmly on growth,'' said Michael Klawitter, a market strategist at WestLB, in a note to investors.

-- Guy Daley (guydaley1@netzero.net), October 01, 2001