Thursday, February 19, 1998
                                                                                                                                                                USDJPY at 126.15

The Idea
Those looking to raise Debt funds over the next few months would do well to consider taking a loan in Japanese Yen, instead of the conventional Indian Rupee or US Dollar.

The potential benefits for the borrower are:

1. A large Interest saving - 6 month JPY Libor rules at 1% whereas Rupee funds are available in excess of 17%
   
2. A probable currency depreciation in the Yen against both the Dollar and the Rupee.
   

Historical Context
The Yen has depreciated from 80 in 1995 to 134 in 1998 against the Dollar, a fall of 67.5%, or 22.5% p.a. It had depreciated from 0.36 in Feb '96 to 0.28 in May '97 (a fall of 22%) against the Rupee, before appreciating to the current rate of 0.3150.

These movements can be seen in the accompanying graphs. Our reading is that movements in the Japanese Yen should continue to reward borrowers over the next 12 months and more.

Future Movements
In the words of Ravi Bulchandani, Currency Analyst with the Global Economic Forum team of Morgan Stanley Dean Witter, "The Japanese Yen is going to remain the funding currency of choice" for some time to come.

Kenneth Landon of Deutsche Morgan Grenfell points out that while the USD-JPY Options market is currently discounting a near term strengthening in the Yen, it is also simultaneously pricing in a depreciation in the Yen against the Dollar further down the road.

Our view is that, while the Yen trades below 127 and depending on the outcome of the G7 meeting over 21st and 22nd February, USDJPY may reach 120 and may even over-extend to 118 over the next 4-6 weeks. Thereafter, it should trade in a range of 118-122 for a month or two before commencing to climb towards 130-135 over a 12 month time-frame. Currently we would place a probability of 55% on this eventuality.

In case the Yen continues to appreciate beyond 118, it will trade at 110 over the next 3 months. However, we place a probability of only 20% on this outcome.

A third possibilty is that the much awaited "Fiscal Stimulus' to be announced by LDP on 20th February, 1998 disappoints the market and the G7 so much that the Yen weakens beyond 127 immediately, opening up the 135 region over a 2-3 months time frame. We would place a 25% probability on this outcome at the present juncture.