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Yen Dives to 5-year Low as Equity Markets Rally

NEW YORK (The Street) - Japanese investors are feeling very bullish. That's what a five-year high in the Euro-Yen trade is signaling after a year in which both the Nikkei and the S&P 500 sustained rallies.

What's more, the yen is set to go even lower against major global currencies.

Japan's third quarter GDP of 0.3% illustrated the fragile state of its economic recovery and translates into an annualized growth of just 1.1%. This has raised expectations for further Bank of Japan easing while Prime Minister Shinzo Abe's flagging popularity is likely to prompt him support any measures that stimulate growth.

Currency strategists also point to an inverse relationship between the yen and global equity markets - where the foreign profits of Japanese companies rise and bolster the Nikkei when their currency is low. "The yen tends to appreciate in a risk-off backdrop because Japanese investors repatriate assets," Macquarie Bank's global currency and interest rate strategist Thierry Wizman said in a phone interview.

PIMCO's head of global specialty portfolios Scott Mather noted the Euro/ Yen pair was akin to the currency market's bellwether for risk. A strong rise in this currency pair illustrates the starkest difference in global central bank policies: the European Central Bank is not accommodative and is allowing its long-term refinancing operations to roll off. By contrast, the Bank of Japan is seen as the most accommodative central bank globally, as it attempts to kick-start the moribund domestic economy.

The Yen/ USD cross was at its lowest level since September 2008 on Friday, with the US dollar buying 103.23 Japanese yen. Growing expectations that the U.S. Federal Reserve will begin cutting its bond purchases from next week have also brought forward rate rise predictions.

This will act as a further depressant to the yen - a low yielding currency - in a backdrop where global interest rates are expected to rise, Nomura's senior FX strategist Yujiro Goto said in a phone interview. "Japanese economic data has also been a bit weaker," the London-based strategist added. "And the Bank of Japan has 4 board members (from 9) who are skeptical that 2% inflation will be achieved in 2 years."

For the yen it seems, a backdrop of rising global confidence, rallying equity markets and likely central bank monetary tightening - the BoJ excepted - spells only one question: how low can you go?

-- By Jane Searle in New York 

Stock quotes in this article: JPY, SPX 

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