野村證券

The strong yen bias could be enhanced by the negative effect on the Japaneseeconomy, reduced tolerance for risk, and the repatriation of funds in the wake ofthe earthquake. Flow triggered by the earthquake was not the primary driver of thesharp appreciation in the yen following the Great Hanshin (Kobe) earthquake in1995 and needs to be broken out and examined separately to understand. Whilewe can not rule out the possibility of USD/JPY breaking through 80 over the shortterm, if this were to happen, we think Japanese authorities would respond withintervention and monetary easing. Over the medium term, we expect USD/JPY tobe supported by improvement in the US and global economies and recovery inJapan on the back of restoration-related demand.

We offer our condolences to the people of the stricken areas and all those whohave been affected.

Slight strong-yen effect: We look at the effect of the earthquake and otherexternal shocks on the yen from the perspective of (1) reducing risk/securingliquidity, (2) pressure related to Japan's creditor nation position, and (3) changesin macroeconomic fundamentals. Overall, we think the latest tragedy will have theeffect of strengthening the yen. Just because Japan has suffered substantialdamages does not mean that the yen will weaken.

In terms of the first two considerations above, some assets in Japan and overseasare likely to be converted to funds for repairs, restoration, insurance and otherneeds in Japan. We do not expect casualty insurance claims related to accidentstriggered by the earthquake to be excessively large (our insurance sector analystsays claims came to 78.3bn in 1995.) Taking this, along with the likelihood thatrisk tolerance will be restrained, we think the earthquake will have the effect ofslightly strengthening the yen.Given that nonresident investors have been net buyers of Japanese equities overthe past several months, we see the possibility of an outflow of funds asnonresident investors sell some Japanese assets. However, on the whole, wethink nonresident investors continue to be underweight on Japanese equities, andthat this will be more or less offset by the repatriation of funds by Japaneseinvestors, which have a net credit position, and the curtailment of outwardinvestment, which both have the effect of strengthening the yen.

In terms of the third consideration above—macroeconomic fundamentals—overthe short term we look for production and consumption to decline, but over thelonger term we think restoration demand will have a positive effect. Our economicsteam estimates the disaster will push back the timing of Japan's breakout from itscurrent economic lull to the second half of this year or beyond. As has been thecase over the past several years, when economic straits dampen risk tolerance inJapan, the yen tends to strengthen owing to the currency’s creditor nation status.Once the economy expands on the back of demand from restoration efforts thisshould pave the way for yen depreciation, but for now we think yen appreciationhas been enhanced to some extent.

What effect will fiscal and monetary policy have? We think the Diet will shelvestalled budget deliberations for now and focus on putting together supplementaryspending for the restoration of affected areas. While a more aggressive fiscalpolicy should boost real interest rates and support an appreciation in the currency,yen depreciation tends to gain impetus with a lag on the back of economic recovery. The Bank of Japan will shorten its Policy Board meeting to one day on14 March in response to the emergency. We expect the central bank to assuremarkets that it will continue to supply liquidity as needed, but without much leewayto lower interest rates, we do not expect this to have the effect of weakening theyen. If the yen were to continue strengthening and equities were to continueweakening, we think the BOJ would take additional monetary easing steps.

Difference with yen strengthening following Kobe earthquake in 1995: Manypeople have asked us how the latest disaster compares with the Kobe earthquakein 1995. In 1995, the yen strengthened sharply in the three months after theearthquake. USD/JPY ultimately broke below 80 to a record low. The economiesof Iwate, Miyagi and Fukushima prefectures that have been affected mostseriously this time account for 4% of GDP, about the same scale as the HyogoPrefecture economy that was devastated by the Kobe earthquake in 1995. Thatsaid, the damages to infrastructure in the latest earthquake are more widespreadowing to the effect of the tsunamis, which also aggravated the human toll. Oureconomists expect the short-term economic effect this time to exceed that in 1995,which we think will strengthen the yen by making investors less likely to take risk.However, we do not think the main driver of the strong yen in 1995 was flowtriggered by the earthquake. A sharp increase in US interest rates in 1994 led tocrisis in Mexico and uncertainty in the dollar. In Japan, risk tolerance declined, andbecause US-Japan trade negotiations were in their final stages, there were strongunderlying concerns about yen appreciation. In addition, life insurers and otherJapanese entities accelerated the hedging and selling of assets denominated inforeign currencies (also owing to accounting issues; insurance companies had torecord their mark-to-market losses once the losses exceeded 15% and theyrushed to sell foreign bonds before the losses exceeded 15%), contributing to theyen's sharp appreciation between the earthquake and the end-March book-closingperiod. The BOJ lowered interest rates in April 1995 in response to the strong yen.

Intervention in response to yen appreciation possible over the short term:The destruction from the latest earthquake is likely to have the effect ofstrengthening the yen. The backdrop to the dramatic yen strengthening thatoccurred in the wake of the Kobe earthquake is different this time. However,USD/JPY remains strong at around 82 despite higher interest rates in the US (aweak yen factor). As the earthquake overlaps with the period prior to the end ofthe financial year for most companies in Japan, when investors can be jittery, wesee the risk that the slight strong yen bias emanating from the latest tragedy couldprovide the impetus for USD/JPY to break through 80.

USD/JPY continues to be supported by recovery in the US and global economies,and we think it will weaken to the mid-80 to 90 range over the medium term. Overthe short term, the strong yen bias could increase, but we think authorities aremore likely now than before the earthquake to intervene. If a negative chainreaction were to occur in which the damages from the earthquake lead to a furtherstrengthening of the yen, Japanese authorities would likely be justified in takingaction to stem the yen's appreciation. Unlike normal times, we expect that US andEuropean authorities become more torelant to Japanese intervention. Bysupplying ample liquidity in concert with intervention in the foreign exchangemarket, we think the BOJ would be able to maintain a cooperative stance with itspartners by not sterilizing funds used in the intervention in the short term. contin