ARTICLES MODERN

By Kosuke Goto and Ron Harui

(Bloomberg) — The yen dropped against all 16 of the most-active currencies on speculation Bank of Japan Governor Toshihiko Fukui will signal plans to leave interest rates unchanged to support economic growth.

The currency ended a four-day advance against the dollar as a government report showed the biggest drop in Japanese housing investment in a decade in the third quarter, threatening growth already at risk from a global credit market slump. The yen fell the most in two weeks against the euro as all 37 economists surveyed by Bloomberg anticipate the BOJ will keep the overnight lending rate at 0.5 percent today.

The BOJ is unlikely to hike rates until March, as the economy is doing badly,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank, Germany’s second- largest bank. “This is a negative for the yen.”

The yen fell to 110.17 per dollar as of 10:43 a.m. in Tokyo from 109.41 in New York yesterday, when it rose to 109.13, the highest in 1 1/2 years. Japan’s currency slid almost 1 percent to 160.50 a euro from 158.99.

The yen also fell after Japanese Prime Minister Yasuo Fukuda said the currency’s extreme volatility is not desirable and warned against speculative moves. Fukui will hold a press conference at 3:30 p.m. in Tokyo.

The Bank of Japan outlook may encourage traders to resume carry trades, in which they borrow in a country with low interest rates and invest the funds in a currency where rates are higher, earning the spread between the borrowing and lending rates. The risk is that exchange rates may change.

Volatility Drops

One-month implied volatility for the yen fell to 16.75 percent today, down from 17.45 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options.

The Japanese currency declined to 97.16 against Australia’s dollar, from 95.83 in New York yesterday. It also slid to 82.35 per New Zealand’s dollar from 81.37.

The yen remained lower even after a government report showed Japan’s economy grew in the third quarter after shrinking in the previous three months.

The world’s second-largest economy expanded an annualized 2.6 percent from a revised 1.6 percent contraction in the second quarter. Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo that the government needs to monitor the impact of Japan’s housing market, oil prices and U.S. mortgage defaults.

Housing Slump

Housing investment was the largest drag on growth, falling an annualized 27.8 percent, after the government enforced stricter rules for obtaining building permits in response to a 2005 scandal involving faked earthquake-engineering data.

“This data won’t motivate the Bank of Japan to bring forward an interest rate increase,” said Gen Kawabe, senior currency manager in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan’s third-largest trust bank.

A technical indicator some traders use to predict currency movements signaled that the yen would decline. The yen’s 14-day relative strength index against the dollar was 22.88, a level that signals the Japanese currency’s gains may be excessive. A level above 70 or below 30 signals a reversal may occur.

Fukuda Warning

Prime Minister Fukuda said speculators should be very careful not to provoke intervention. His comments, in an interview to be published in the Financial Times, were relayed to reporters by a Japanese government official, who declined to be named.

“People do not think Japan will intervene in the markets very soon, but his comments seem to have prompted yen selling,” said Yuji Saito, head of the foreign-exchange sales department in Tokyo at Societe Generale SA, France’s third-biggest lender.

The yen may fall to 111 per dollar today, Saito said.

Any gains in the dollar may be limited by speculation U.S. pending home sales probably fell 2.5 percent in September following a decline of 6.5 percent a month earlier, according to the median forecast in a Bloomberg News survey. The data is scheduled for release at 3 p.m. New York time.

To contact the reporter on this story: Kosuke Goto in Tokyo at kgoto2@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net

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