Do you remember the last time the Japanese went on an overseas buying binge? Barclays Says Yen Set for Worst Fiscal First Quarter Since 1989 By Kosuke Goto http://www.bloomberg.com/apps/news?pid=20601087&sid=a3D4EMZB7eQg&refer=home April 4 (Bloomberg) -- The yen will slump 5 percent this quarter, the worst start to a fiscal year since 1989, as Japanese free up more capital for investment overseas, said Toru Umemoto, chief foreign-exchange strategist at Barclays Capital. Disheartened by interest rates that are only 0.5 percent and with the Bank of Japan unlikely to raise borrowing costs until the quarter starting July, individuals will take on more risk, said Umemoto, the most accurate forecaster for the yen last year in surveys by Bloomberg News. The currency will drop to 125 against the dollar, he said, the weakest since December 2002. Individuals will push the yen lower as the fastest pace of growth in three years in the quarter ended Dec. 31 gives them greater confidence to send money overseas, said Tokyo-based Umemoto. Japan's currency fell the past two years as investors borrowed and sold the yen in so-called carry trades for better yields elsewhere. ``The yen's downtrend will continue as Japanese, who are fed up with low returns, continue to outflow capital,'' Umemoto said in an interview on April 2. ``Individuals will play the leading role.'' Overseas assets held by Japan's household sector reached 46 trillion yen ($387.2 billion) in 2006, nearly 10 percent of the nation's gross domestic product, but only 3 percent of their total financial holdings, based on Umemoto's own calculations. Breathing Room The Japanese currency traded at 118.75 per dollar at 10:48 a.m. in Tokyo from 118.96 late in New York yesterday. The yen is down 0.8 percent this week, the first of the fiscal year that started April 1. It gained 1 percent last quarter as some investors exited carry trades as they reduced risk because of the global rout in stock markets. ``It's likely that there's breathing room for households to shift money from safe but low return deposits to riskier, higher return assets abroad,'' said Masafumi Yamamoto, a currency strategist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader. ``The Japanese ratio at 3 percent does not look particularly high.'' Yamamoto is less bearish on the yen than his counterpart at Barclays, predicting the currency will fall to 119 a dollar by June 30. He said Japanese overseas holdings rose 27 percent last year from the previous year, citing data complied by the Bank of Japan, monthly data from the Investment Trust Association Japan, and Citigroup's own estimates. Bank Deposits Japanese mutual funds boosted purchases of overseas assets to about 40 percent of the total from about 8 percent in 2002, according to the Investment Trust Association. The mutual funds now have about $244 billion of assets denominated in foreign currencies, including $98 billion in the U.S. dollar. Among 16 of the world's most-actively traded currencies, the yen is weaker against all over the past month, with the biggest losses versus the Australian and New Zealand dollars, favorites for carry trades. Borrowing costs in both countries are 5.75 percentage points and 7 percentage points higher than those in Japan, respectively. The yen weakened 4.3 percent versus the New Zealand dollar and 3.3 percent against Australia's currency in the period. The ratio of Japanese household savings parked in banks and post offices accounted for about half of their total financial assets of 1,550 trillion yen, compared with 10 percent in the U.S. and 30 percent in Europe, Barclays' Umemoto said. That will continue to decrease as more funds go overseas, he said. Credit Suisse, Fortis Credit Suisse and Fortis Bank were the two most bearish for the yen among 49 contributors to a Bloomberg survey last month, forecasting losses to 125 and 127 against the dollar this quarter. The median estimate was 117. Japanese individuals' foreign currency-denominated assets exceeded 40 trillion yen in 2006, topping such assets held by life insurers, the Nikkei newspaper also reported on March 31, excluding the estimated amount of foreign-currency positions by Japanese foreign-exchange margin traders. Life insurance companies, commonly known as Seiho in Japanese, used to play a major role in the financial markets of the late 1980s during Japan's asset-inflated bubble economy by purchasing massive amounts of foreign bonds. ``We cannot ignore individual power,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``Japanese individuals account for about 20 percent to 30 percent of foreign-exchange trading in the Tokyo time zone. Institutional investors will lag behind households.'' The yen may fall to 122 a dollar by June 30, Muramatsu said.