Japanese stock markets take a toll despite strengthening yen

Japan's Topix Falls 20% From 2007 High, Signaling Bear Market

By Elizabeth Stanton

Nov. 22 (Bloomberg) -- Japan became the first of the world's 10 biggest stock markets to enter a bear market when the Topix index declined 20 percent from its 2007 peak.

The 39-year-old Topix, the broadest gauge of equity prices in the world's second-largest economy, fell 2.1 percent yesterday to 1,438.72, the lowest since October 2005 and down 20.8 percent from its 2007 high of 1,816.97 on Feb. 26.

Japanese companies are struggling with slowing economic growth in the U.S., their largest market for exports, the yen's appreciation and record crude oil prices. The Topix decline from a 15-year high in February signals the government's efforts to revive the economy from more than a decade of inconsistent growth, have hit a snag, investors said.

``Performance potential is limited by a deteriorating economic outlook, both foreign and domestic,'' said Florence Barjou, Paris-based strategist at Lyxor Asset Management, which oversees $100 billion.

The Nikkei-225 Stock Average, created in 1949, is just short of bear market territory. It fell 2.5 percent yesterday to 14,837.66, the lowest since July 2006 and down 18.8 percent from a six-year high of 18,261.98, also on Feb. 26.

The Nikkei is a price-weighted average of 225 Japanese companies including Toyota Motor Corp, Mitsubishi UFJ Financial Group and NTT Docomo Inc. with a median market value of 748.9 billion yen ($6.89 billion). The Topix is a capitalization- weighted index of 1,719 companies with a median market value of 469.8 trillion yen.

Less Than Stellar

The Topix decline ``would be an official bear market so to speak, but Japan hasn't been an area of stellar growth for 10 years,'' said Paul Hickey, managing partner at Bespoke Investment Group LLC in Harrison, New York.

Most stock markets have fallen this month, with the U.S. Standard & Poor's 500 Index down 8.6 percent, on pace for its worst month since September 2002. The declines reflect expectations that investment losses created by the biggest slump in housing since 1991 are curbing growth in the world's largest economy.

The MSCI World Index of developed-country shares is down 7.9 percent from a record on Oct. 31, and the MSCI Emerging Markets Index has fallen 11 percent from its high on Oct. 29.

Toyota, the Japanese company with the largest market value, fell 2.8 percent yesterday to a 16-month low amid concern U.S. sales will slow. Toyota is the second-biggest auto seller in the U.S. behind General Motors Corp.

Rising Yen

The yen has strengthened against all 16 major currencies since mid-year, making Japanese products more expensive in other countries. Against the dollar it has gained 9.8 percent, reaching a more than two-year high of 108.51 per dollar yesterday.

Losses in global credit-markets are fueling the yen's rise by spurring investors to sell higher-yielding assets that were purchased with yen borrowed at low interest rates and sold. The Bank of Japan's overnight call rate, the main rate at which banks lend to one another, is 0.5 percent, the lowest among the major economies.

Record crude oil prices, a problem for all manufacturing economies, are a particular disadvantage in Japan, which imports almost all of the oil it uses. Crude oil futures touched a record $99.29 a barrel in New York Mercantile Exchange trading yesterday, and are up 62 percent in the past year.

The Bank of Japan on Oct. 31 cut its growth estimate for the year ending in March to 1.8 percent from 2.1 percent. Reflecting reduced expectations for economic growth, the yield on 10-year Japanese government bonds yesterday fell to a 23-month low of 1.439 percent.

Investors in Japan's stock market have experienced worse over the past two decades than the drop from this year's peaks. In 1990, the Topix lost almost 40 percent of its value and the Nikkei lost almost 39 percent.

Yen carry trades unwind

Yen Trades Near Two-Year High Versus Dollar on Growth Concerns

By David McIntyre and Kosuke Goto

Nov. 22 (Bloomberg) -- The yen traded near a two-year high against the dollar on concern widening credit-market losses will slow global economic growth, pushing investors to sell higher- yielding assets financed by borrowing in Japan.

The yen was also close to the strongest in about two months against the Australian and New Zealand dollars, favorites of the so-called carry trade, as global stocks fell. The dollar reached an all-time low against the Swiss franc on concern the Federal Reserve will cut interest rates for a third time this year to prevent subprime mortgage losses dragging the U.S. economy into recession.

``There is yen strength to come,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``People are unwilling to take carry trade positions. You can't have the subprime sector implode without any consequences.''

The yen traded at 108.41 per dollar at 9:21 a.m. in Tokyo after touching 108.26 yesterday, the strongest since June 2005. The currency was at 161.01 per euro from 161.13 late yesterday, when it reached 160.08. Gains in the yen will accelerate should it rise above 108.20 per dollar today, Pontikis said.

The yen traded at 94.53 per Australian dollar from 94.39 yesterday in New York when it reached 93.72, the strongest since Sept. 11. It was at 81.41 against New Zealand's dollar from 81.50 yesterday when it touched 80.72, the highest since Sept. 18. The Nikkei 225 Stock Average fell 0.7 percent today,

Thanksgiving Holiday

Currency fluctuations may be exaggerated because U.S. stock and bond markets are closed today for the Thanksgiving holiday, said Kazuyuki Takami, a manager of the currency trading department at Bank of Tokyo-Mitsubishi UFJ, a unit of Japan's largest publicly traded bank by assets.

The dollar traded at $1.4855 per euro and 1.1018 against the Swiss franc. The U.S. currency dropped to a record low of $1.4870 per euro yesterday and earlier touched 1.1015 versus the franc.

The dollar has declined 11 percent this year against the euro as the Fed's two rate cuts since September to 4.5 percent reduced the allure of U.S. assets. The U.S. Dollar Index traded on ICE Futures U.S. in New York touched a record low of 74.944 yesterday, the weakest since the gauge started trading in 1973.

Fed Rate Cuts

The odds of the Fed cutting rates a quarter-percentage point to 4.25 percent on Dec. 11 were 90 percent, up from 68 percent a month ago, futures contracts traded on the Chicago Board of Trade show.

Reports yesterday showed the Reuters/University of Michigan's final consumer sentiment index for November fell to 76.1, while the New York-based Conference Board's index of leading U.S. economic indicators slid 0.5 percent in October.

The yield advantage of U.S. two-year Treasuries over similar-maturity Japanese government debt shrank to 2.26 percentage points today, the narrowest since 2004, making U.S. assets less attractive to international investors. The two-year German bund widened its yield advantage over comparable-maturity Treasuries to 65 basis points, the widest since 2004.

Gains in the yen may be limited by speculation importers will take advantage of its gains to buy foreign currencies.

`Good Opportunity'

``This level is a good opportunity for Japanese importers to buy the dollar against the yen,'' said Tokyo-Mitsubishi UFJ's Takami. ``They will take advantage of the yen's rally.''

Japan's currency may fall to 109.50 a dollar today, Takami forecast.

The yen has advanced against all 16 of the most-actively traded currencies this month as investors reduced holdings of carry trades. In that time, Australia's dollar declined 12 percent, New Zealand's currency weakened 8.6 percent while South Africa's rand lost 11 percent.

In carry trades, investors borrow money in low-yielding economies such as Japan and lend the funds in high-yielding countries to profit from the spread. The risk is that currency moves wipe out earnings. When the trade weakens, traders sell high-yielding assets and buy yen to repay borrowings.

Volatility Declines

One-month implied volatility for the yen fell to 14.75 percent today, down from 14.98 percent yesterday. Implied volatility on one-month euro-dollar options also slid to 17 percent from 18 percent yesterday.

The benchmark interest rate in Australia is 6.75 percent while New Zealand's is 8.25 percent. Japan's borrowing cost is 0.5 percent while Switzerland's is 2.75 percent.

``People are worried about a slowdown in global growth and they are running away from risky assets, giving a boost to the yen's strength,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of MF Global Ltd., the world's largest broker of exchange-traded futures and options contacts. ``The fear is that we may see a few more shoes drop.''

The cost of borrowing in dollars for three months rose to the highest in four weeks yesterday, said the British Bankers' Association. U.S., European and Asian stocks sank. The Standard & Poor's 500 Index fell 1.6 percent, erasing its gain this year.

The spread, or extra yield, investors demand to own emerging-market dollar bonds instead of Treasuries widened to 2.6 percentage points yesterday, the most since 2005, according to JPMorgan Chase & Co.'s EMBI Plus index.

Fed signals higher interest rates after 25bps cut

Some BOJ Members Said Low Rates Caused Subprime Rout (Update1)

By Mayumi Otsuma

Nov. 5 (Bloomberg) -- Bank of Japan board members said the U.S. subprime mortgage collapse was caused by keeping interest rates too low, signaling their intention to increase the world's lowest borrowing costs to prevent investment bubbles.

Some of the nine members said a ``long period'' of global monetary easing had led to ``excessive financial behavior'' that resulted in the U.S. home-loan crisis, according to minutes of the Sept. 18-19 board meeting published today in Tokyo.

The Bank of Japan is concerned that keeping its key interest rate at 0.5 percent risks seeding future asset bubbles. The subprime crisis was caused in part by investors who wanted higher returns amid low global interest rates buying securities linked to loans to people with poor credit histories. Defaults on the loans caused a shortage of credit and led to losses at banks including Citigroup Inc. and Merrill Lynch & Co.

The Bank of Japan is saying ```look, the risks we're talking about, that's what hit the U.S.,''' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``All good central banks are forward-looking but they're caught between the short-term circumstances and long-term risks.''

The central bank last week kept its benchmark rate on hold and cut its forecasts for this year's economic growth and inflation. Governor Toshihiko Fukui said ``downside risks'' for the Japanese economy are rising as U.S. growth slows and financial markets remain volatile.

`Not a Slogan'

Still, Fukui said last week that Japan's ``very low'' rates need to rise gradually as the economy expands. Failure to do so would encourage excessive investment that may lead to swings in economic growth, he said on Oct. 31.

``This is not just a slogan. We're serious about this view,'' he said.

Most members at the September meeting said they're watching the employment situation, home prices and banks' willingness to lend to determine the strength of U.S. consumer spending.

A few members said they need to carefully check whether financial markets and the U.S. economy will affect the bank's outlook for Japan's growth and inflation, the minutes show.

Policy makers at the meeting agreed on their basic view that Japan's interest rates need to be raised gradually according to developments in the economy and prices.

One member said the bank has time to examine the influence of financial-market turmoil and global economic growth on the Japan economy.

Another board member said the bank shouldn't hesitate to raise interest rates as long as it's confident Japan's economy will keep growing in line with policy makers' predictions.

Yen carry trade is over "for now"

Yen Rises to Six-Week High; G-7 Shows Concern on Global Growth
By Kosuke Goto and Ron Harui

Oct. 22 (Bloomberg) -- The yen rose to a six-week high against the dollar after the Group of Seven nations said a credit-market rout will slow economic growth, prompting investors to sell riskier assets bought with loans in Japan.

The Japanese yen advanced versus all 16 of the most-active currencies and reached a three-week high against the euro as investors reduced so-called carry trades. The dollar fell to an all-time low versus the euro after the G-7 communique failed to address the currency's decline following an Oct. 19 gathering in Washington.

``There is no doubt that the carry trade is over for now,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``Investors are risk averse and the yen is being bought.''

The yen rose to 113.26 a dollar, the strongest since Sept. 10, before trading at 113.43 at 9:31 a.m. in Tokyo from 114.51 late Oct. 19 in New York. It also climbed to 162.49 per euro, the highest since Sept. 26, before trading at 162.62, from 163.79. The dollar fell to $1.4348 per euro, the lowest since the European currency was formed, before trading at $1.4337.

Japan's currency may advance to 112.50 against the dollar and 162.00 per euro today, Muta forecast.

The yen rose most against the New Zealand's and Australia's dollars, popular carry trade currencies. It climbed to 84.00 versus New Zealand's dollar, the highest since Sept. 25, from 85.60 on Oct. 19. It also strengthened to 100.47 versus the Australian dollar from 101.94 and advanced to 8.08555 versus South Korea's won, the strongest since Sept. 18, from 7.91915.

Carry Trades

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

One-month implied volatility for the yen rose to 9.9 percent today, from 7.93 percent a week ago. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades.

The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.

Japan's Nikkei 225 Stock Average fell 3 percent.

Volatility `Undesirable'

The statement will ``make the foreign-exchange market sensitive to the global slowdown,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``The yen is likely to appreciate due to a decline of global equity prices, in particular emerging market equity prices.''

Japan's currency may rise as high as 109 a dollar by year- end, Umemoto said.

Policy makers representing the U.S., U.K., Japan, Germany, Italy, France and Canada stuck to language in prior statements, saying ``excess volatility'' in currencies is ``undesirable'' and that currencies should trade in line with fundamentals.

``The G-7 meeting will do little to stop the U.S. dollar's fall,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp in Sydney. ``Outside the French, the level of concern on the euro was limited. Other officials sounded almost supportive of a weaker U.S. dollar.''

The G-7 also intensified calls for China to let its currency strengthen. The Chinese yuan ended last week at 7.5080, having advanced 4.1 percent against the dollar this year compared with the euro's 8.9 percent gain versus the U.S. currency. China's currency has lost 4.4 percent versus the euro.

`Correct Direction'

``We have been advancing in the direction of a market- oriented, foreign-exchange regime,'' People's Bank of China Deputy Governor Wu Xiaoling said in Washington last week. ``Maybe we are not rushing things as some people wish us to do, but we are moving in a correct direction and in a smooth manner.''

China has built $1.4 trillion in reserves while managing its currency to fuel exports. The National Development and Reform Commission forecast last month that the nation's trade surplus might widen to $300 billion this year, from $177.5 billion in 2006.

The euro may strengthen after European Central Bank officials said food costs and record oil prices are fanning inflation pressures in the 13 euro nations.

``Inflation risks have increased recently'' and the ECB will ``have to counter these risks should they materialize,'' said Germany's Bundesbank President Axel Weber in an interview yesterday. Austrian colleague Klaus Liebscher said the threat of faster inflation is ``significant.''

Oil prices have surged 45 percent since the start of the year and the cost of crude rose above $90 per barrel for the first time on Oct. 19.

``A stronger euro is good for the ECB, which is worried about inflation risks,'' said Osamu Takashima, chief analyst for global market sales and trading at Bank of Tokyo Mitsubishi UFJ Ltd. ``The ECB will prefer a stronger euro to a rate hike.''

Europe's single currency may rise to $1.45 against the dollar this year, Takashima said.

Yen falls on carry trades

Yen Falls as Gains in Stocks Spurs Confidence in Carry Trades
By Ron Harui and David McIntyre

Oct. 8 (Bloomberg) -- The yen fell to the lowest in two months against the euro as gains in global stocks gave traders confidence to increase holdings of higher-yielding assets funded with money borrowed in Japan.

The yen slid versus 15 of the 17 most-active currencies as investors increased so-called carry trades on bets Asian equities will follow U.S. stocks higher. It fell most against the New Zealand and Australian dollars after the Standard & Poor's 500 Index rose to a record last week as U.S. employment growth eased concern the world's largest economy will slip into recession.

``The yen hasn't found a low versus the euro yet,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``The carry trade is back in vogue and the U.S. economy is going okay.''

The yen declined to 165.46 per euro at 8:25 a.m. in Singapore from 165.38 late in New York Oct. 5. It touched 165.80, the lowest since July 25 and may extend losses to 167.50 over the next week, Pontikis forecast. Japan's currency traded at 117.05 per dollar from 116.97.

Australia's dollar climbed to 105.40 yen, the highest since July 27, from 104.02 yen late in Asia on Oct. 5. New Zealand's dollar rose to a two-month high of 89.39 yen from 88.32 yen. Trading may be 40 percent less than usual as Japanese and U.S. markets are closed for a holiday, said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney.

The Morgan Stanley Capital International Asia-Pacific Index of regional shares rose for a second day, adding 0.2 percent.

`Beginning to Hurt'
Gains in the euro may be limited by speculation a European finance ministers meeting today will discuss ways to stem the advance. French Finance Minister Christine Lagarde said on Oct. 5 the meeting should talk about the sale of euros by the European Central Bank. The euro strengthened to a record for eight straight days to Oct. 1, reaching $1.4283. It rose to a 10-week high of 165.80 yen today and traded at $1.4137 versus the dollar.

``There's quite a strong risk that they'' may agree on the need to take action against the euro's strength, said Westpac's Rennie. ``That is something that's going to prevent further gains in the euro-dollar and the euro-yen. You've got a currency that is beginning to hurt.''
The euro may decline to $1.3900 and 163 yen this week, Rennie forecast.

European officials including Italian Prime Minister Romano Prodi and his Luxembourg counterpart Jean-Claude Juncker last week said they are concerned about the euro's potential effect on the economy. Euro-region finance ministers meet at 5 p.m. in Luxembourg.
The dollar also may be supported after International Monetary Fund's Managing Director Rodrigo de Rato said the U.S. currency is ``undervalued,'' the Financial Times reported yesterday, citing an interview.

Yen strengthens further on unwinding carry trades for high yield assets in foregin currencies

Yen Climbs to Four-Month High Against Euro on Subprime Losses
By Ron Harui and David McIntyre

Aug. 15 (Bloomberg) -- The yen rose to a four-month high against the euro and the New Zealand dollar as widening credit- market losses prompted investors to cut higher-yielding assets funded by loans in Japan.

The yen has gained against all 16 most-active currencies this month as investors exited so-called carry trades that have pushed down the yen 6.5 percent versus the euro in the past year. Japan's currency has surged 8.5 percent against New Zealand's dollar in August, heading for the best month in seven years.

``We envisage further yen gains,'' said Sue Trinh, a currency strategist at RBC Capital Markets said in Sydney. ``The tolerance for risk remains exceptionally low as we see increasing signs of global contagion emanating from the U.S. related to subprime delinquencies.''
The yen climbed to 158.62 per euro at 12:40 p.m. in Tokyo, the strongest since April 5, and to 117.33 per dollar from 117.57. It rose 1.2 percent against the euro and 0.6 percent versus the dollar yesterday.

The Nikkei 225 Stock Average fell 1.6 percent and the Morgan Stanley Capital International Asia-Pacific Index of shares declined 1.7 percent after U.S. stocks dropped yesterday. The Standard & Poor's 500 Index and Dow Jones Industrial Average fell 1.8 percent and 1.6 percent, respectively.

Coventree Inc., the Canadian firm that failed to sell asset- backed commercial paper because of a credit crunch, said some lenders declined to offer emergency funding for C$700 million ($655.8 million) of maturing debt. Canada's dollar weakened 1.3 percent yesterday, the biggest fall since June 2006, and dropped to 93.51 U.S. cents today.

Positive for Yen
``The credit concerns are ending up in places except the U.S., like Europe, Australia and so forth,'' said Luke Waddington, head of interbank currency sales in Tokyo at Royal Bank of Scotland Group Plc. ``It seems there's a contagion. It's very positive for the yen,'' which may advance to 117.00 against the dollar and 158.30 per euro today, Waddington said.

New Zealand's dollar, a favorite of the carry trade because its interest rate is 7.75 percentage points higher than Japan's, has slid the most among the 16 major currencies in the past week, falling 4.2 percent against the yen. The Australian dollar has dropped 2.3 percent.
The New Zealand dollar declined to 84.60 yen from 85.40 and the Australian dollar fell to 97.64 yen from 98.11, the weakest since April 24 as Basis Capital Fund Management Ltd., an Australian hedge fund battered by declines in the U.S. subprime market, said losses in its Yield Fund may exceed 80 percent.

U.S. Treasuries
Losses in the dollar may be limited by speculation the slump in global credit markets will spur investors to seek the safety of U.S. government debt.

``There's a good chance that they will put their money into Treasuries,'' said Xing Wei, a currency dealer at Shinsei Bank Ltd. in Tokyo. ``It's a plus for the dollar,'' which may gain to 118.00 yen and $1.3500 per euro today.

The yield on the benchmark two-year Treasury notes fell 2 basis points, or 0.02 percentage point, to an 18-month low of 4.34 percent, according to bond broker Cantor Fitzgerald LP.

A Labor Department report may show today the consumer price index last month rose 0.1 percent following a 0.2 percent gain a month earlier, according to a Bloomberg News survey of economists. Inflation excluding food and energy, the so-called core CPI, may have gained 0.2 percent, the same increase as in June, the Bloomberg survey also showed.

Japan's currency will strengthen beyond 116 per dollar by the end of September on concern growing losses on U.S. subprime mortgages will prompt investors to shun riskier assets, according to BNP Paribas.

Hedge Fund Liquidation
Hans Guenter Redeker, global head of currency strategy at France's biggest bank, said the market should be on alert today, when hedge funds will know how much of their funds will be withdrawn at the end of the quarter. Any further liquidation will prompt investors to exit carry trades and repay loans made in yen for purchasing higher-yielding assets.

``Bad news on the subprime market is far from over,'' said London-based Redeker. ``I suspect there will be more hedge fund liquidation. Risk aversion will push funding currencies such as the yen higher.''

The euro fell to the lowest in more than six weeks versus the dollar on speculation subprime losses are spreading to Europe.
The currency dropped for a third day, the longest run since June 28, on concern turmoil in financial markets will prompt the European Central Bank to delay an interest-rate increase next month. A Spanish newspaper reported yesterday Banco Santander SA has more than 2 billion euros ($2.7 billion) of investments in U.S. high-risk loans.

``The longer this goes on, the risk of them not being able to raise rates in September will rise quite significantly,'' said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. ``It's just going to be a case of slow and steady decay for the euro'' to $1.3450 in the next week, he said.

Europe's single currency fell to $1.3517 per dollar, the lowest since June 29, from $1.3533 yesterday.

Yen advances on unwinding carry trades

Yen Advances on Speculation Investors Are Reducing Carry Trades
By Stanley White and Ron Harui

Aug. 14 (Bloomberg) -- The yen rose for a second day against the euro and the dollar on speculation investors are reducing riskier assets funded by loans in Japan amid concern losses related to U.S. subprime mortgage defaults are spreading.

Asian equities followed U.S. stocks lower after Sydney-based RAMS Home Loans Group Ltd. said a shakeout in global debt markets may cut its earnings. The yen has advanced against all of the 16 most-active currencies tracked by Bloomberg since July 20, when the subprime crisis sparked a global financial market rout, prompting the unwind of so-called carry trades.

``Traders may try to buy the yen against the euro today,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There's a lingering sense that subprime problems will be with us for a while, so some people will want to play it safe and reduce yen carry trades.''

The yen climbed to 160.39 against the euro at 10:48 a.m. in Tokyo from 160.97 late yesterday in New York and near a four- month high of 159.98 reached on Aug. 10. Against the dollar, the yen rose to 117.84 from 118.25. Japan's currency gained 0.7 percent versus the euro yesterday and has rebounded from a record low of 168.99 on July 23. It may reach 160.05 today, Soma said.

Currency movements may be exaggerated by O-bon holidays this week, when Japanese often take week-long vacations to honor ancestors, Soma said. Trading volumes today may be less than half the usual amount, he said.

The Morgan Stanley Capital International Asia-Pacific Index of shares fell 0.2 percent, following yesterday's 0.1 percent decline in the Standard & Poor's 500 Index. U.S. subprime lender Aegis Mortgage Corp. filed for bankruptcy and Canadian financial- services company Coventree Inc. said it failed to sell asset- backed commercial paper yesterday.

N.Z. Retail Sales
The New Zealand dollar fell 1.2 percent to 86.41 yen after retail sales unexpectedly dropped 0.4 percent in June as record- high borrowing costs curbed domestic demand. The Australian dollar declined 0.7 percent to 98.87 yen and the pound fell 0.4 percent to 237.03 yen.

These currencies have benefited from yen carry trades because of interest rates as much as 7.75 percentage points higher than those in Japan.

``In the short term we have these credit issues and the U.S. stock-market performance was very ordinary,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``What we are having is the unwinding of the carry trade.''

Volatility on one-month dollar-yen options was at 10.80 percent, near the 15-month high of 11.15 percent yesterday. Volatility on one-month euro-yen options was at 11.80 percent, close to yesterday's high of 11.85 percent, the strongest since April 2004. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.

Money Markets
The Bank of Japan drained 600 billion yen ($5.1 billion) from the financial system after adding money for the past two days to anchor interest rates. The bank had provided 1.6 trillion yen since Aug. 10 to rein in rates toward its target of 0.5 percent, joining U.S. and European central banks to help avert a crisis of confidence in global credit markets.

The Reserve Bank of Australia added A$2.61 billion ($2.2 billion) to its financial system today. The central bank has injected A$9.10 billion via so-called repurchase agreements to the banking system since Aug. 10.

``The BOJ may have to add funds to the financial system in the future, because no one is sure how long the subprime loan problem will affect the credit market,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The RBA also shows this problem isn't completely finished. This kind of uncertainty helps the yen, because it will lead people to avoid risk and unwind carry trades.''

The yen may rise to 117.50 against the dollar and 160 per euro today, he said.

Treasury Payments
The dollar fell against the yen on speculation Japanese investors will bring home cash from the U.S. amid concerns credit-market losses will deepen.

The U.S. currency weakened for a second day as the Treasury is due to make coupon payments on $22.6 billion of government debt tomorrow, the most since August 1999, according to Wrightson ICAP. The dollar has dropped 2.5 percent versus the yen since July 20, when a collapse of the subprime-mortgage market caused a plunge in global shares.

``Investors are risk averse as they're worried about the credit issue, so they're likely to repatriate those payments,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``It's negative for the dollar and positive for the yen.''
The dollar may decline to 117.60 yen and $1.3720 per euro today, Saito said.

Yen correction may be temporary as carry trades prevail

Hot money bounded for emerging market equities and other assets.

Weakening yen and dollar contributes to growth of M3 in emerging markets. A temporary boon for equities?


Yen Rises Most in 10 Weeks as Investors Reduce Carry Trades
By David McIntyre and Kosuke Goto

June 27 (Bloomberg) -- The yen rose the most in 10 weeks against the dollar as investors pared holdings of emerging market bonds and stocks funded by loans in the currency.

Japan's yen gained against the Indonesian rupiah and Malaysian ringgit after Finance Minister Koji Omi yesterday stressed the risk of one-way foreign-exchange bets. It also climbed against the New Zealand dollar after that nation's central bank Deputy Governor Grant Spencer echoed Omi's comments and said traders should expect further market intervention.

``Concern about declines in Asian equities are a good chance to unwind bets for yen weakness,'' said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. ``Traders are wary of selling the yen following comments from Japanese officials.''

The yen rose to 164.92 per euro at 6:56 a.m. in London from 165.83 late in New York yesterday. Japan's currency climbed to 122.70 per dollar from 123.26, its biggest one-day gain since April 17. It may rise to 165 per euro and 122.70 against the dollar today, Ibaraki said.
Japan's currency increased the most in three weeks against New Zealand's dollar to 93.84 yen from 94.41 yen yesterday.

Not One-Way Bet
``The exchange rate is not a one-way bet,'' Deputy Governor Grant Spencer said in an article prepared for publication and e- mailed to Bloomberg News today. ``Foreign exchange intervention is an ongoing process.''

The yen appreciated 1 percent against Australia's dollar, its biggest gain since April 19, to trade at 103.47 after reaching as high as 103.38, the strongest since June 15.

Investors' confidence to put on so-called carry trades, in which they borrow at Japan's low interest rates to buy higher- yielding assets elsewhere, may ebb as the Morgan Stanley Capital International Asia-Pacific index of leading regional shares fell by the most in almost three weeks. The Standard & Poor's 500 Index is set for the biggest monthly loss in more than a year.

Gains in the yen may be limited by speculation fund managers will convert it into foreign currencies as they prepare to launch investment trusts composed of overseas assets.

Finance companies will market more than 1 trillion yen ($8.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. Japan's benchmark rate is the lowest in the industrialized world, reducing the appeal of domestic assets.

``We're going to see carry trades for a long time,'' Gabriel de Kock, chief currency economist in New York at Citigroup Global Markets, said at a conference on foreign exchange in Singapore. ``The yen will be a dog.''

The yen will drop to 125 per dollar by year-end as Japan's 0.5 percent rate encourages investor outflows, said Daisaku Ueno at Nomura Securities Co.

Narrow Range
The narrowest monthly trading range in more than six years in April will prompt Japanese investors to seek higher-yielding foreign assets, pushing down the yen, Ueno said.

The yen that month traded within the smallest band since Oct. 2000, according to data tracked by Bloomberg. The spread between the high of 117.41 yen on April 2 and the low of 119.87 yen on April 16 was 2.46 yen. The range in May was 2.90 yen. The currency this month has had the range of 3.36 yen. The monthly trading range has averaged 4.8 yen since Jan, 2000.

`Likely to Prevail'
``Dollar-yen doesn't move as it used to,'' said Ueno, who in March was named best foreign-exchange analyst in the 19th annual Nikkei analyst rankings. ``In such a situation, the yen carry trade is likely to prevail. The yen's weak trend won't change.''

The dollar also declined against the yen on a report that's likely to show U.S. durable goods orders fell 1 percent last month, the most since January, after rising a revised 0.8 percent in April, according to the median forecast of 73 economists surveyed by Bloomberg.
``There's a real risk that we continue to see U.S. data disappoint,'' said Jonathan Cavanagh, a currency strategist at Westpac Banking Corp. in Sydney. ``The dollar has further to go on the downside.''

The euro's rally from a June 13 low may stall, according to technical charts traders use to predict currency movements, said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo.

The failure of the euro to sustain a break above so-called resistance at $1.3470 for the three previous days suggests further gains may be limited, Saito said. Resistance is a level where sell orders may be clustered.

``The euro looks bearish on the charts,'' he said. ``The euro may pull back to $1.3400 today,'' from $1.3439.

The $1.3470 level represents a 50 percent retracement of the euro's fall to the June 13 low from the April 27 high of $1.3681, based on a series of numbers known as the Fibonacci sequence.

Capital Account Outflow from Japan pushing the Yen lower?

Yen Trades at 4 1/2-Year Low Against Dollar on Yield Disparity
By Agnes Lovasz and David McIntyre

June 14 (Bloomberg) -- The yen traded at the weakest against the dollar since December 2002 as investors were enticed by the yield advantage on U.S. Treasuries over Japanese debt.

The yen has dropped 3 percent this year as traders reduced bets on lower U.S. interest rates, causing the 10-year yield spread with Japan to widen to a four-year high. Traders also expect the Bank of Japan to keep its key interest rate at the lowest among major economies tomorrow. Low Japanese rates have encouraged purchases of higher-yielding assets financed by borrowing in yen, the so-called carry trade.

``We're highlighting outflows by retail investors as the primary driver for yen weakness,'' said Adam Cole, senior currency strategist at Royal Bank of Canada Europe Ltd. in London. ``And the market still has appetite for borrowing yen and buying high-yielding assets. The yen will keep going down.''

The yen fell to a low of 122.97 per dollar, the weakest since Dec. 12, 2002, before trading at 122.89 at 9:13 a.m. in London from 122.72 late in New York yesterday. Cole expects the yen to be at 126 by year-end. It fell to 163.58 per euro, from 163.36. The euro was little changed at $1.3312, bouncing up from $1.3290 earlier.

The Japanese currency's descent may accelerate should it weaken beyond 123, where there are sell orders, said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets.

``The yen's downward momentum is strong,'' said Kato. ``Yen- selling is likely to continue'' to 123.20 per dollar today.

Japan's currency fell to the weakest in 15 years against the Australian dollar, reaching 103.19 yen, before recovering to 103.01 as Reserve Bank of Australia Governor Glenn Stevens said in a speech today he would have ``time'' to respond to inflation pressures, adding to signs he won't raise rates any time soon.

Interest-Rate Differentials
The yen has fallen 2.7 percent versus the New Zealand dollar and 2.1 percent against Australia's this month as investors took advantage of Japan's borrowing costs to buy assets in those countries. The benchmark rate is 6.25 percent in Australia.

The Reserve Bank of New Zealand raised its key rate to 8 percent on June 7. New Zealand's dollar has rebounded 1.6 percent against the yen to 92.32, after slumping 2.2 percent from a 17- year high of 93.11 on June 11, when the central bank sold the currency to stem gains.
``Investors are focusing on interest-rate differentials,'' said Mizuho's Kato.

The difference in yield between a 10-year Japanese and U.S. note was 3.26 percentage points, near the widest since March 2005.
The BOJ will hold its target rate at 0.5 percent tomorrow, according to all 43 economists surveyed by Bloomberg. That compares to 5.25 percent in the U.S.

Barrier Options
Gains in the dollar against the yen may stall around 123, because of sell orders to protect barrier options, said Nobuaki Tani, a senior currency dealer at Resona Bank Ltd. in Tokyo.

``There seem to be a lot of offers between 122.80 and 123, some of which are to defend options,'' Tani said.

A barrier has a knock-out that renders an option worthless should it be triggered. Options give holders the right to buy or sell a currency at a set price on a fixed date. An investor who buys an option can only lose the premium paid.

The euro may be supported by speculation a report today will show inflation in the 13-nation region remained close to the European Central Bank's 2 percent ceiling for a third month.

ECB Rate Hikes
Europe's single currency yesterday rebounded from an 11-week low against the dollar after ECB President Jean-Claude Trichet said the central bank will deliver price stability, suggesting higher borrowing costs.

``We're likely to see more ECB rate hikes,'' said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. ``This will be positive for the euro,'' which may advance to $1.3380 and 164 yen today.

The euro may trim a 1.1 percent decline versus the dollar this month as consumer prices probably increased 1.9 percent in May from a year earlier, according to a Bloomberg News survey.

Interest-rate futures show traders are betting on at least one more quarter-point rate increase from 4 percent, and have increased wagers on a second one by year-end.

The implied yield on the December Euribor contract was 4.545 percent, up from 4.515 percent a week earlier. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points more than the key rate since 1999.
The Swiss franc erased gains against the euro and fell against the dollar after the central bank raised its target interest rate a quarter point to 2.5 percent today.

Against the euro, the franc traded at 1.6574, from 1.6550 shortly before the rate decision, and 1.6566 late yesterday. It was also at 1.2450 to the dollar, from 1.2446.