NEW YORK - The yen may retain gains that made it the best-performing major currency this year as returns in Japan adjusted for inflation exceed the US's, damping the impact of the central bank's efforts to drive down borrowing costs, Brown Brothers Harriman & Co said.

The accompanying chart shows 10-year government bond yields for Japan and the US adjusted for consumer price changes, along with the dollar-yen rate. With the gauge of costs dropping 1.3 percent in January from a year earlier, Japan's real returns exceed those for Treasuries.

"Japanese real rates are very high, underpinning the yen, as that suggests the real return on investment is greater," said Marc Chandler, who helps Brown Brothers Harriman manage $40 billion in assets as global head of currency strategy in New York. The three-month spread on London interbank offered rates "is too small to be very important".

The yen traded at 89.97 per dollar as of 7:03 am yesterday in Tokyo, up 3.4 percent against the dollar this year, the largest gain among the Group of 10 major currencies. It will decline to 92.5 yen by June 30, according to the median forecast of 40 institutions surveyed by Bloomberg News.

BLOOMBERG NEWS

(China Daily 03/11/2010 page14)