The Japanese yen yesterday fell to a 4-1/2-year low to trade at more than 100 to the US dollar. The key level was breached after speculation that Japanese institutional investors were buying overseas assets in search of higher returns.
"Unconfirmed sources said Japanese insurance companies and pension funds are seeking to buy 30-year US Treasury bonds while the treasury bonds in Japan are not rewarding," said Mark Wan, the chief analyst at Hang Seng Investment Services.
Ten-year US Treasury bonds yielded 1.8 per cent, compared with 0.6 per cent for the equivalent bond in Japan, triggering the capital outflow from Japan.
The yen fell to as low as 101.20 per dollar, more than 2 per cent off Thursday's high of 98.65.
The yen has slid 26 per cent against the dollar since September last year, mainly driven by selling pressure from overseas investors.
"When Japanese investors start to sell yen and buy overseas bonds, it will trigger another sell-down in the yen," Wan said.
Japanese investors bought a net 514 billion yen (HK$39.3 billion) in foreign bonds in the two weeks to May 3, Ministry of Finance data shows.
Japanese investors had been net sellers of foreign bonds in 11 of the previous 12 weeks, selling 5.87 trillion yen in total.
Wan expects the yen to weaken further to 103 per dollar before touching 107 by year end, in line with the gradual US economic recovery.
"If the US economy expands even quicker, this will give rise to a larger yield difference and a meltdown in yen," he said.
The weakening yen has benefited Japanese food retailers and travel agents in the city. CEC International, which sells Japanese snacks, rose 5.7 per cent yesterday to HK$1.11, on lower sourcing costs.
Wing On Travel booked an increase in Japan-bound tourists of more than 30 per cent so far this year and expects continued growth for the rest of this year.
Simon Ma Sai-man, an assistant general manager for Wing On's Asia and long-haul destinations, cited Cathay Pacific Airways' plan for daily flights to Sapporo, up from four flights a week, in July and August as a key boost for tourism.
"I expect tourist numbers will increase by 40 per cent year on year, if not more, during the summer holiday," Ma said.
Ivan Chu Kwok-leung, the chief operating officer at Cathay, said on Wednesday the airline would add more charter flights to secondary destinations in Japan to cope with demand.
In contrast, garment manufacturers would feel the pinch as Japanese buyers suspended their orders due to higher costs, said Willy Lin Sun-mo, a deputy chairman at the Federation of Hong Kong Industries.
"They ceased placing orders several weeks ago and they want to wait and see how the customers will react if they raise prices," he said.