Inflation

The Chinese yuan may rise more than 10 percent this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

China's currency has strengthened 1.4 percent this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005, as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China, Japan's biggest trading partner, to stop keeping the yuan artificially weak to support exports.

``Chinese authorities now recognize that they need to appreciate their currency quite significantly for their own sake,'' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television.

A rising yuan would make Chinese goods more expensive in global markets, bolstering the competitiveness of Japanese exporters. The yen may advance as much as 12 percent to 95 per dollar by summer as the U.S. economy slows and the Bank of Japan refrains from intervention to slow the rally, he said.

Sakakibara was dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the finance ministry. He correctly forecast in an interview in October that the dollar would plunge against the yen because of the risk of a U.S. slump.

The yen rose to 106.73 per dollar from 106.90 in New York yesterday. The yuan, which climbed 7 percent last year, traded at 7.1948 as of 6:30 a.m. in London, compared with 7.1970 at yesterday's close, according to China Foreign Exchange Trade System. The yuan had a correlation of 0.86 with the yen over the past six months, according to data compiled by Bloomberg. A reading of 1 would mean the two currencies move in lockstep.

Too Bullish?

Sakakibara's forecast suggests the yuan will rise beyond 6.57 per dollar by the end of the year. That is more bullish than the 6.80 median estimate of 32 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on an 8.4 percent advance to 6.6390 in the next 12 months.

Sakakibara said today that Japan's central bank is unlikely to intervene to slow the yen's advance because the U.S. government is opposed to interfering with currency markets.

``Mr. Sakakibara is too bullish on the yuan,'' said Xinyi Lu, chief strategist at the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second- largest publicly trader lender. ``China is aiming for a soft landing on a plateau of slower growth without excessive appreciation of the yuan.''

The currency may end the year at 6.8, Lu said.

Rate Increase Debate

China has amassed record foreign-exchange reserves of $1.5 trillion as the central bank tempers strength in the yuan to prevent exporters' earnings from being eroded by currency gains.

``With that kind of very heavy intervention in the foreign- exchange market, the tightening of monetary policy is extremely difficult,'' said Sakakibara. ``China would start to tighten and appreciate the currency quite significantly'' once the Cabinet is changed around March, he said.

China raised interest rates six times last year to help slow inflation from the highest in 11 years. China's consumer prices rose 4.8 percent last year, exceeding the government's target of 3 percent.

China's government yesterday said snowstorms have caused ``very serious'' power shortages and may aggravate food price inflation.

The ``Chinese now recognize that they can live with a rapidly appreciating yuan and, as a result, they're letting the yuan appreciate more each day,'' Harvard University economist Martin Feldstein, head of the National Bureau of Economic Research in Cambridge, Massachusetts, said in an interview with Bloomberg Radio.