Swaps signal worst yen fall since 2005

The price of hedging against losses on US$10 million of the country's bonds with credit-default swaps soared this month to as much as US$76,160 a year from US$37,000 in August, as the new government planned record spending and borrowing even with tax revenue falling. The rise in debt protection costs contrasts with that of the U.S., where prices have fallen to about the lowest in a year amid unprecedented issuance. The difference in prices reached the widest ever on Nov. 9 after Japan's debt grew to almost twice the size of the economy.

“The Japanese fiscal situation is horrific,” said Richard Benson, who helps oversee US$11 billion of currency funds at Millennium Global Asset Management in London. “We went short the yen against the dollar and the euro about a month ago” and then turned “more aggressive” on the trade as credit-default swaps rose and investors dumped Japanese bonds, he said, declining to specify the firm's gains. Selling yen for euros and dollars would have returned as much as 4.3 percent since Oct. 1, data compiled by Bloomberg show.

Japan's unprecedented debt, near-zero benchmark interest rate, ballooning budget deficit, sinking savings rate and worst postwar recession all are aligned against the yen.

The Bank of Japan will stand alone in keeping borrowing costs at near-record lows next year to revive the Group of 10's fastest-shrinking economy, making its assets less attractive to investors, median Bloomberg survey predictions show. The world's second-biggest economy last year at US$4.9 trillion will contract 5.7 percent in 2009, compared with an average of 2.5 percent for the nine other largest economies, according to median forecasts.

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