Standard & Poors Puts Four Dubai Banks on Credit Watch

Dubai banks Emirates Bank International PJSC, National Bank of Dubai, Mashreqbank PSC and the Dubai Islamic Bank PJSC have all been put on credit watch by Standard & Poor's rating agency after the city state's largest corporate entity, Dubai World, asked creditors for a six-month standstill on debt repayments.

The agency has placed its CreditWatch on the the 'A-' long-term rating for the four banks while affirming its 'A-2' short-term ratings on Emirates Bank International, National Bank of Dubai and Mashreqbank.

"The rating actions reflect the large exposure these banks have to Dubai World and Nakheel, and more generally to Dubai-based government related entities, and the risks that the standstill agreement would pose to these banks," said S&P credit analyst Mohamed Damak.

"This comes at a time when the deteriorated economic environment, including the fall of real-estate prices, has already started to weigh on the financial profile of these banks," he added.

Asset quality indicators are also expected to worsen as some of these banks have exposure to Ahmad Hamad Al Gossaibi Brothers and Saad Group, which defaulted on their obligations earlier in 2009.

Dubai's Woes Shake U.A.E. Region

Investors remained rattled, two days after the government said it would take charge of restructuring its corporate flagship, Dubai World, and asked creditors to accept delayed payments.

The dollar and the yen roared higher Friday as the fallout from the Dubai debacle continued to resonate through global financial markets. Proving that gold doesn't always benefit during bouts of risk aversion, gold fell 4% along with a decline in crude oil and a drop in equities.

Meanwhile, equities markets across Asia fell sharply Friday. Japan's Nikkei 225 Average fell 3.2% to 9081.52, its lowest close since July. In Hong Kong the Hang Seng Index plunged 4.8% or 1075 points to 21134.50, led down by banking stocks. HSBC Holdings shares in Hong Kong fell 7.6% and Standard Chartered shares closed down 8.6% on news the banks were directly exposed to Dubai's debt problems.

European shares, which droped sharply Thursday, rebounded from early session lows Friday ahead of the U.S. stock market open, suggesting that the selloff on Dubai World's debt worries was overdone. The U.S. stock market is reopening Friday after the Thanksgiving holiday on Thursday. (See complete markets updates at WSJ.com/markets.)

A Wednesday announcement of a six-month standstill in debt payments took investors and analysts by surprise. It followed months of positive moves and comments from government officials suggesting Dubai and the federal government of the United Arab Emirates were willing to step in to plug financing holes.

"The most negative effect of [the] announcement is a major shock to confidence in the U.A.E. and the region more generally," said Richard Fox, a credit analyst at Fitch Ratings in London. "People will now question government support."

Amid a scramble by international bankers and analysts to assess global exposure to Dubai, the company said Thursday that its cash-generating ports division, DP World, wouldn't be included in the restructuring.

Company executives and representatives didn't respond to requests for comment. Sheik Ahmed bin Saeed al Maktoum, head of Dubai's finance committee, said in a statement Thursday that "our intervention in Dubai World was carefully planned and reflects its specific financial position," according to Zawya Dow Jones. "We understand the concerns of the market and the creditors in particular. However, we have had to intervene because of the need to take decisive action to address its particular debt burden," he said, promising more details next week.

Dubai's standstill request is one more troubling development for international banks, which turned in recent years to the oil-rich Middle East as a source of income. Both local and international banks also are licking their wounds from the debt troubles this year of two big family-run Saudi Arabian conglomerates, which owe more than 100 lenders a conservatively estimated $15 billion.

Dubai World is seeking a six-month moratorium on interest payments, a person familiar with the matter said. During that time, it could negotiate with creditors a restructuring that would pare liabilities, which include $20 billion of loans and bonds coming due in the next 18 months, according to estimates. If the lenders don't agree, Dubai World will default on the notes, the person said.

The banks with the greatest exposure to Dubai World are Abu Dhabi Commercial Bank and Emirate NBD PJSC, people familiar with the matter said. Executives at the two banks weren't available for comment Thursday.

Among the international banks that have large exposure are the U.K.'s Royal Bank of Scotland Group PLC, HSBC Holdings PLC, Barclays PLC, Lloyds Banking Group PLC, Standard Chartered PLC and ING Groep NV of the Netherlands, the person said.

RBS has lent roughly $1 billion to Dubai World, another person said.

Barclays's exposure to Dubai World is roughly $200 million, and that exposure is effectively hedged, according to people close to the matter.

Despite the surprise, people close to the banks said they still believe Dubai, or its neighboring emirate, Abu Dhabi, won't risk tarnishing their images further by leaving foreign creditors in the lurch, and will agree to a reasonable plan.

Standard & Poor's put four Dubai's banks on credit watch because of their exposure to Dubai World. The cost of insuring against a Dubai default rose to $547,000 a year per $10 million in debt from $318,000 on Tuesday, according to CMA, a credit-data provider.

Holders of a $3.5 billion sukuk, or Islamic bond, issued by Dubai World property subsidiary Nakheel, due next month, face the most immediate threat. Nakheel bonds dropped from about 110 cents on the dollar before the news Wednesday to about 70 cents.

Investors assumed that the cash coming from the United Arab Emirates would give Dubai ample ability to pay off the Nakheel bond, and Dubai also had sent signals that it was willing to support its corporate entities.

A problem now, observers said, is that the circumstances behind Dubai's moves are murky, making it hard to gauge the exact risk to the bonds and Dubai's own general creditworthiness.

"The uncertainty may drag on for some time yet, before we have a clear idea as to how issues will be resolved," said Huw Worthington, an analyst at Barclays Capital in London.

On Wednesday, the government of Dubai said in a statement that it appointed Deloitte LLP to spearhead an overhaul of the company, effectively sidelining current management. All year, Dubai World has been shedding jobs and cutting costs. That didn't appear enough for government officials.

A spokeswoman for the Dubai government's Department of Finance said on Wednesday that "the Dubai government decided it needed to take a more proactive role."

Dubai World Chairman Sultan Ahmed bin Sulayem would remain in place, she said.

Dubai World has served as Dubai's main driver of growth, operating a globe-spanning ports and transportation group and spearheading real-estate and infrastructure projects at home and abroad.

Real-estate subsidiary Nakheel built Dubai's iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. With little oil, Dubai financed much of this with debt.

Sony Bets On 3-D To Drive TV Sales

Sony Corp. expects new 3-D compatible televisions will account for up to half the TVs it sells in roughly three years, as it outlined details of its effort to prop up its slumping electronics business.

Hiroshi Yoshioka, Sony's executive deputy president and the head of its consumer products and devices group, also said the company is holding talks with several auto makers to enter into the promising but crowded market for lithium-ion car batteries. He didn't name the auto makers. Most of a $1 billion investment in battery technology over the next few years will go toward car battery development, he said, adding that Sony has also increased staffing in that area.

A Sony Corp. 3-D television and videogame demonstration in October.

the Japanse company offered last week, when Sony outlined plans to rely heavily on 3-D technology and online content to reach an operating profit margin of 5% in the fiscal year ending in March 2013.

Sony has already said it targets revenue of more than one trillion yen (about $11.4 billion) from 3-D related products, including televisions, disk players and game consoles, in that fiscal year. The company plans to introduce a 3-D compatible television next year, and Mr. Yoshioka said Thursday those types of sets will account for between 30% and 50% of all televisions sold by the fiscal year ending in 2013. The technology lets viewers choose to watch in the current two-dimensional mode or three dimensions on their TVs while wearing special glasses.

Sales results will depend on available 3-D content, Mr. Yoshioka said, adding that he sees strong potential in videogames. Sony said 3-D television models will be priced at a premium, but it says the glasses required for viewing would be the most costly part for Sony, not the actual production of the television.

In batteries, Sony plans to play up the products' safety. Mr. Yoshioka said the batteries that the company developed after its battery problems of the past enabled Sony to create a safer product. Sony and a number of other companies were plagued in recent year by instances of batteries in consumer products like notebook computer catching fire.

Sony believes the market for batteries is big and promising enough for it to enter, even if it is currently lagging other manufacturers. "We have lots of room," said Mr. Yoshioka. Sony says it currently has about 2,000 employees working in the battery business, but plans to increase that figure.

Under Chief Executive Howard Stringer, Sony is moving to shake up a company plagued by shortcoming in the content and software side of the business and high costs on its manufacturing side. It has forecast an operating loss of 60 billion yen (about $684 million) for the current fiscal year, but Mr. Stringer said the company is striving to break even through cost cuts and other initiatives.

Chinese economic growth

China's top leaders pledged Friday to continue focusing on economic recovery next year and to maintain a basically accommodative policy stance, a statement that will likely reassure domestic businesses and financial markets that it supports continued growth.

The assurance comes amid growing calls from economists for Beijing to start scaling back its moderately loose monetary policy as the economy has staged a robust rebound.

While saying it will continue its monetary policy stance and active fiscal policy next year, the Political Bureau of the Communist Party, or Politburo, has nonetheless left itself some wiggle room.

"We will maintain the continuity and stability of macro-economic policy," the Politburo concluded in a meeting chaired by President Hu Jintao, according to a report on the state television Web site.

"We will maintain our basic macro-economic policy stance, managing well the intensity, pace and focus of implementing policy...to increase the stability, balance and sustainability of economic growth."

As part of efforts to improve the composition of economic growth, the Politburo said it will pay closer attention to transforming how China grows and to economic restructuring, and will also work to boost domestic consumption next year.

The renewed emphasis on restructuring comes as economic growth has returned to pre-crisis levels. The Politburo said the recovery trend has continued to firm.

Despite signs of stabilization in the global economy, U.S. and Chinese academics have urged Beijing to rely less on exports to the U.S. and more on domestic consumption for economic growth, an objective Beijing has also said it shares.

China will also maintain "reasonable" investment growth next year and improve policies to encourage private-sector investment, the report said. Because public investments have driven the rebound in growth this year, economists say a further pickup in private investment will help sustain growth even after the stimulus program ends at the end of next year.

Additionally, China will improve its policies to stabilize external demand for Chinese products and seek to expand imports, in an attempt to promote a steady increase in foreign trade, the report said.

The government will nurture new sectors, including the services industry, encourage the participation of smaller firms in the economy, and increase its efforts to support innovation in China, as part of broader economic restructuring.

It will continue to improve its policies to help farmers and "do a good job of regulating the market for agricultural produce," the report said. Food prices can be major driver of inflation in China as they have a large weighting in the consumer price index, though the statement didn't mention inflationary risks.

Toyota, Sony, Exporters Are on ’Edge of Cliff’ on Yen

Toyota Motor Corp., Canon Inc. and Sony Corp. are among Japanese exporters that may miss their forecasts as the yen strengthens more than they anticipated, eroding their earnings from cameras, televisions and cars sold overseas, investors said.

Toyota, Sony and Canon, which generated more than 70 percent of revenue outside their home country last fiscal year, had projected the yen would average 90 to 95 to the dollar in the current period, based on their latest financial statements.

Canon Chief Executive Officer Fujio Mitarai, who heads the nation’s biggest business lobbying group, said Japan is “standing on the edge of a cliff” as the yen trades at its strongest against the dollar in 14 years, climbing to as high as 84.83 today. The stronger yen may widen the earnings rift between Japanese and South Korean manufacturers after Samsung Electronics Co. and Hyundai Motor Co. reported record quarterly profits.

“Intervention is necessary,” said Koichi Ogawa, chief portfolio manager at Tokyo-based Daiwa SB Investments Ltd., which manages $39.4 billion in assets. “Companies may be forced to cut their forecasts if the yen continues to gain further.”

The Topix Electric Appliances Index, which includes Sony, Canon and Panasonic Corp., fell as much as 3.5 percent and led the broader Topix index lower. The Topix Transportation Equipment Index tumbled as much as 3.1 percent to a four-month low.

‘Breaking Point’

Japan’s electronics companies lose a combined 31.8 billion yen ($369 million) in annual operating profit for each 1 yen appreciation against the dollar, according to a Daiwa Research Institute Ltd. estimate of 44 companies in September.

“We’re at a breaking point,” said Jesper Koll, chief executive officer of hedge fund TRJ Tantallon Research Japan. “There’s a point beyond which businesses don’t work.”

Canon’s Mitarai told reporters today Japan needs “urgent steps to counter this critical situation.” Canon would lose 4.4 billion yen in sales and 2.5 billion yen in operating profit in the three months ending Dec. 31 for every 1 yen gain against the dollar, according to the company.

“If the stronger yen becomes a long-term trend, it may affect our earnings,” Mami Imada, a Tokyo-based spokeswoman at Sony, said by phone today.

Limited Immediate Impact

Sony’s Imada and Sharp Corp. spokeswoman Miyuki Nakayama said the impact on earnings may be small for the current fiscal year because they use forward contracts to hedge currency risk. Panasonic probably won’t be affected through the end of the year even if the yen were to stay at 85 per dollar, spokesman Akira Kadota said.

Still, Panasonic PresidentFumio Otsubo told a government panel yesterday that he didn’t want to look at newspapers because of the strengthening yen and weakening South Korean won.

Should the Japanese currency stay at about 85 yen to the dollar, Toyota’s operating loss may widen by 90 billion yen in the fiscal second half and force the world’s largest carmaker to move more manufacturing outside Japan, said Mamoru Kato, an auto analyst at Tokai Tokyo Research Center in Nagoya, central Japan.

Yuta Kaga, a spokesman at Toyota, which estimated the yen will average 90 yen against the dollar during the six months ending March 31, said the current exchange rate may push down earnings. The company’s annual operating profit, or sales minus the cost of goods sold and administrative expenses, is reduced by 30 billion yen when the Japanese currency rises 1 yen against the dollar, according to the company.

Japan vs. Korea

The currency appreciation may spur corporate bankruptcies early next year by hitting domestic demand-based industries in Japan, said Nobuo Tomoda, an official at Tokyo Shoko Research Ltd. “While personal spending is in a slump amid deflation, companies such as retailers and services industries may struggle to survive.”

A stronger yen weighs on prices by making imports cheaper, pressuring domestic producers to discount goods to avoid losing customers.

Not all carmakers may reduce their estimates. Honda Motor Co., Japan’s second-largest automaker, and Nissan Motor Co. based their second-half earnings forecasts on the assumption the yen will trade at 85 to the dollar.

Korean Exporters Helped

The won has fallen 20 percent against the dollar and 37 percent against the yen in the past two years, helping South Korean exporters gain U.S. market share from Japanese rivals.

Sony and Panasonic, the world’s two largest makers of consumer electronics, have eliminated more than 48,000 jobs since September last year, as they struggle to compete against Samsung, Asia’s largest maker of chips and flat screens. Suwon, Korea-based Samsung reported record profit in the second quarter, citing a global economic recovery that spurred a rebound in prices.

Toyota and Honda, Japan’s two biggest automakers, have said they may increase overseas production as the stronger yen makes exports less competitive. Japanese carmakers have lost market share to South Korea’s Hyundai, which posted a record profit in the second quarter.

Shift Production Overseas

Toyota Executive Vice President Takeshi Uchiyamada said last month the company must “think about producing overseas what is now being produced in Japan.” Nissan, Japan’s No. 3 automaker, will fully use its production capacity in the U.S. and Mexico in the “very short term,” Nissan Chief Executive Officer Carlos Ghosn said at last month’s Tokyo Motor Show.

“An impact would be inevitable if the yen strengthens more,” Shigeru Jibiki, a spokesman for Mitsubishi Motors Corp., said today. “We’ll continue to cope with the situation by promoting cost reduction.”

“We’re not very concerned about a higher yen,” said Megumi Tezuka, a spokeswoman at All Nippon Airways Co., Japan’s second largest airline, which projects the local currency will average 95 yen a dollar in the fiscal second half. “We may have a drop in revenue but that should be covered by cheaper purchasing costs from abroad.”

Jet kerosene, priced in dollars, was ANA’s largest operating expense last fiscal year, accounting for 25 percent of its air transportation costs, according to the company’s figures.

Dubai’s Debt-Payment Delay

Ten-year Treasury yields fell to the lowest level in eight weeks as the yen strengthened to a 14-year high versus the dollar, boosting speculation the Bank of Japan will intervene in the currency markets. Treasuries headed for a third weekly gain as economists forecast the Federal Reserve will keep interest rates near zero until the third quarter of next year. U.S. markets were shut yesterday for the Thanksgiving holiday.

“There is a spike in risk aversion and Dubai was the trigger for that,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse AG in Zurich. “It’s bullish for Treasuries and this will likely dominate today.”

The yield on the benchmark 10-year note fell 8 basis points to 3.20 percent as of 10:18 a.m. in London, according to BGCantor Market Data. It slid earlier 12 basis points to 3.15 percent, the biggest decline since Oct. 30. The yield has declined 17 basis points this week. The 3.375 percent security due November 2019 rose 21/32, or $6.56 per $1,000 face amount, to 101 16/32.

Dubai World, the government investment company burdened by $59 billion of liabilities, will ask all creditors for a “standstill” agreement as it negotiates to extend debt maturities, Dubai’s Department of Finance said two days ago in an e-mailed statement.

Stocks Slide

The MSCI World Index of shares slid 0.7 percent today after dropping 1.4 percent yesterday. Futures on the Standard & Poor’s 500 Index dropped 2.5 percent.

The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 23 basis points to 564, according to JPMorgan Chase & Co. prices at 7:18 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and an increase indicates a deterioration in perceptions of credit quality.

Japan’s currency rose to 84.83 per dollar today, the strongest since July 1995, increasing concern the nation’s monetary authorities will intervene to curb further appreciation of the currency.

“People are scared and concerned about possible intervention,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. The BOJ may sell the yen “and buy Treasuries, which will be a plus for Treasuries.”

Yen Intervention

Japan’s most recent intervention took place on March 16, 2004, when the central bank sold the yen. Finance Minister Hirohisa Fujii said on Nov. 26 the government needs to take action on “abnormal” currency movements, and Prime Minister Yukio Hatoyama said the same day the yen’s appreciation was due to weakness in the dollar.

Demand for Treasuries increased this week as Fed policy makers indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline.

“Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” according to minutes of the Fed’s November meeting released Nov. 24.

Yield Curve

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 2.14 percentage points from 2.19 percentage points last week.

The difference between two- and 10-year rates, known as the yield curve, widened 4 basis points to 2.56 percentage points today, according to data compiled by Bloomberg. Two-year year yields tend to follow what the Fed does with interest rates, while those on longer-maturity securities are more influenced by the outlook for inflation.

Treasuries of all maturities have gained 1 percent so far this month, according to indexes compiled by Merrill Lynch & Co.

The securities have handed investors a loss of 1.5 percent in 2009, headed for the first decline since 1999 as President Barack Obama borrows record amounts to fund spending programs and service deficits. U.S. marketable debt totaled $6.95 trillion in October, after climbing to a record $7.01 trillion in September.

Asian Markets and Dubai Worries

Stock markets fell across Asia on Friday as investors, spooked by news that Dubai was seeking to suspend some debt repayments, piled out of assets they considered risky.

The Hang Seng index in Hong Kong sagged 4.8 percent and South Korea’s key market gauge, the Kospi, fell 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan dropped 3.2 percent. Banking shares were among the worst hit amid concerns about potential exposure to Dubai’s billions of dollars in debt.

Stock markets in Europe also headed lower during the morning, extending the falls they had suffered during the previous session. And Wall Street — which had been closed Thursday for the U.S. Thanksgiving holiday — was also set for a rocky day when markets reopen Friday.

The root of the latest turmoil was a surprise announcement on Wednesday from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow its main investment vehicle, Dubai World, to suspend its debt repayments for six months.

The announcement — the global high finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Still, the news stunned investors and caused markets around the world to swoon even as analysts struggled to explain which fears of contagion were legitimate and which were overwrought.

Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its $59 billion debt, worries about the sovereign debt of Middle Eastern countries swimming in oil reserves were unfounded.

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday: “Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far. I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

Still, in the mentality of the market, guilt by association can be a powerful force. Referring to the unexpected move by Dubai World, Mr. Davidson said, “It will tarnish the reputation of the Gulf region a bit, and it will certainly make investors more bearish again about emerging markets.”

Bank shares were among the worst hit by the global nervousness amid concerns that some might have sizeable exposures to the affected debt.

In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai, and Standard Chartered added that it would issue a statement “if there was anything material to disclose.”

Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn. When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors. At least that is what investors had assumed.

The shock announcement on Wednesday upended the assumption that Dubai would stand behind Dubai World and that other emirates, especially Abu Dhabi, would stand behind Dubai.

Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.

Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”

And Mr. Wolter of RBS said he believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.

On Friday, the price of oil, already undermined by the uncertain outlook for global recovery, fell to below $74 per barrel.

On the foreign exchange markets, the Japanese yen briefly hit ¥84.82 to the dollar — its strongest level against the U.S. currency in 14 years — prompting the country’s finance minister, Hirohisa Fujii, to say that he was “extremely nervous and watching the market carefully.”

“There’s no doubt the market has moved too far in one direction. Moves right now are extreme, and it would be possible to take appropriate measures,” he added, according to Reuters.

The dollar’s weakness has been broad-based, but is causing especial jitters Japan, whose economy is still struggling to emerge from a deep recession. A strong yen — which makes exporters’ good more expensive for consumers in the United States — is something Japan’s export-oriented economy can ill afford.

By late afternoon in Tokyo, the dollar had recouped some ground to trade at around ¥86.30, but it remains strong in comparison to earlier this year.

The dollar has fallen against Japanese currency for years, in part because of longstanding worries about the United States’ chronic trade imbalances and debt.

At the same time, the yen often strengthens in times of uncertainty, when Japanese investors tend to pull back on overseas investments and move their assets back to Japan. This explains why the yen has continued to appreciate despite the fact that the Japanese economy is in a deep funk, and interest rates there are ultra-low, said Patrick Bennett, a strategist at Société Générale in Hong Kong.

Mr. Bennett said he expected politicians to “ratchet up their tone” before potentially intervening in the markets. At the same time, he said, many exporters had by now learned to live with a stronger yen, meaning that the fall-out for them — and the overall economy — may not be as overwhelmingly negative as is commonly believed.