JAPAN

[rffrydr]

Core rate up .5%; 3 in a row:

"Mitsubishi UFJ Securities senior strategist Naomi Hasegawa said remarks this morning by Prime Minister Junichi Koizumi fueled conjecture that the central bank will soon end its present policy.

'[Changes in] consumer prices are coming in above zero and we are seeing signs of getting out of deflation,' Koizumi told a parliamentary committee.

His comments were his most positive yet on recent indications that the economy is winning its battle with falling consumer prices. Previously, Koizumi had insisted that it was too soon to say that the economy was coming out of deflation."


Bonds and stocks were short going in. End-of-day showed resiliency, (complaceny?)

Hey Henry, Devil's advocate: with Japanese debt at a Godzilla-sized 160% GDP on the worlds fastest aging population (and most afraid of foreign workers) do they have any choice BUT to reflate their way out? And politicians want a decade for "reforms."

An end to quantiative easing may be announced at the end of Japanese Fiscal Year--but this could take a long, long time to play out. Markets 1st "verdict."
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Currency review in FT while debating extent of "new" carry mentions this mortgage is available now in North America.

[HenryTo]

I have seen a study where it predicts a lowering of the maximum rate from 29.2% to 23% could shave as much as 0.36% off of GDP. A further cut to 20% could significantly slow down Japan's economy.

http://japan.seekingalpha.com/article/13720

[rffrydr]

BOJ injected 1Trillion Y last night and is not using the word "inflation" anymore.

The carry is dead...long live the carry!

[rffrydr]

Yes, and forex selling the "fact." With the Japanese it's always a marathon.

Tried getting a yen-based mortgage few years back Apparently the british banks do that stuff with the expat culture and all. I think 2million plus was more their range, not mine!

[HenryTo]

Like I mentioned before, the BoJ will most probably keep interest rates low for the rest of this decade.
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FOREX-Yen slips after BOJ says rates can be kept low
Fri Jul 14, 2006 1:48 AM ET

By Eric Burroughs

TOKYO, July 14 (Reuters) - The yen slipped back towards a two-week low against the dollar on Friday after the Bank of Japan said interest rates can be kept low for some time after a widely expected increase from zero, the first in six years.

The BOJ unanimously voted to lift overnight rates to 0.25 percent, ending an era of zero rates aimed at pulling the economy out of its decade-long stagnation and fighting off deflation.

But with rates in the United States and the euro zone towering much higher at 5.25 percent and 2.75 percent respectively, traders and analysts said the BOJ's policy shift was unlikely to spur much of a yen rally just yet.

By a 6-3 vote the BOJ also raised its official discount rate to 0.4 percent from 0.1 percent, disappointing some market players who had expected a bigger increase to 0.5 percent.

"The decision is slightly bearish for the yen," said Joseph Kraft, managing director of forex trading at Morgan Stanley Japan. "But it's all pretty much within the parameters (of expectations) so there shouldn't be that big of a move in the markets."

The central bank also repeated that rate adjustments will be gradual and that rates can stay low for a while as long as inflation remains subdued.

A 1.2 percent drop in the Nikkei share average <.N225> due to record high oil prices also raised doubts about future BOJ rate increases.

Markets are generally looking for the BOJ to lift rates once more this year to 0.5 percent and possibly to 0.75 percent by the end of the current business year.

Following the BOJ decision, investors will tune in to comments from Governor Toshihiko Fukui at his post-meeting news conference at 0630 GMT.

"The yen is likely to face selling if Fukui says further tightening will be slow," said Kota Kimura, currency trading manager at Shinkin Central Bank. "A rate hike today won't be reason enough to buy the yen against the dollar."

By 0540 GMT, the dollar was up nearly half a percent at 115.90 yen <JPY=>, just off the two-week high of 116.12 yen struck before the BOJ decision on electronic trading platform EBS. The Japanese currency had hit a one-month high of 113.45 yen on EBS earlier in the week.

The euro was up half a percent at 147.05 yen <EURJPY=>, in sight of the record high of 147.42 yen hit last week on EBS.

The euro was little changed at $1.2690 <EUR=>, well off a one-month high of $1.2865 touched last week.

Japanese financial markets will be closed for a holiday on Monday.

SAFER HAVENS

Market players also kept an eye on developments in the Middle East where Israel's retaliation against the Lebanese guerrilla group Hizbollah has heightened investor jitters and helped drive oil prices to record peaks above $78 a barrel <CLc1>.

After digesting the BOJ's decision and Fukui's comments, market attention is likely to shift back to U.S. data due later in the day including retail sales at 1230 GMT and the University of Michigan's preliminary consumer sentiment report at 1345 GMT.

Retail sales are seen rising 0.4 percent in June after climbing just 0.1 percent the previous month. Excluding autos, sales are forecast to show a rise of 0.4 percent compared with a 0.5 percent gain in May.

The Federal Reserve lifted its funds rate for the 17th straight time last month, but opinion is divided on whether it will tightening credit again in August with signs of slowing growth.

The European Central Bank is also expected to boost its key rate next month.

(Additional reporting by Rika Otsuka and Satomi Noguchi)

[HenryTo]

The BoJ has finally done it. I expect the Yen carry trade to further unwind after today.
-----------------------------------------------------------------------------
Bank of Japan Lifts Interest Rates

Quarter-Point Increase
From Historic Low of Zero
Cements Economic Recovery
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
July 14, 2006 1:06 a.m.

TOKYO – Japan's central bank Friday ended its five-year-old policy of keeping interest rates near zero, judging that the nation has emerged from deflation and has overcome a long economic slump.

The Bank of Japan's policy board voted unanimously to raise the unsecured overnight call rate target, its key monetary policy rate, to 0.25% from 0%. The BOJ policy board also voted 6-3 to lift the Lombard rate to 0.40% from 0.10%, which takes effect immediately.

The BOJ's move, widely expected by market participants, brings to a close an era lasting half a decade in which the central bank tried to combat sagging private demand and falling prices by keeping rates near zero and pumping cash into the market.

But economic conditions have improved and inflation has returned to Japan, making senior BOJ officials worried that keeping the extraordinary super-easy policy in place for too long could eventually cause the economy to overheat.

BOJ Governor Toshihiko Fukui will explain the policy decision later Friday.

The BOJ also decided to keep unchanged the amount of Japanese government bonds it buys outright each month at ¥1.2 trillion ($10.36 billion), apparently to meet government requests for the central bank to ensure long-term interest rates don't shoot up.

In a statement issued after the meeting, the BOJ said it will maintain an "accommodative monetary environment ensuing from very interest rates...for some time." On future monetary policy, the statement said the central bank will adjust the policy rate level "gradually" in light of economic and price developments, suggesting that the bank won't rush in raising rates ahead.

Investment banks in Japan have been gearing up for a boom in bond issuance as companies rush to borrow in order to lock in interest rates while they still are extremely low. Investment banks also are preparing for a surge in bond trading and debt-advisory work, as the country adjusts to rising interest rates after a decade of languor in its financial markets and economy.

Interest rates with longer maturities already have risen in anticipation of the Bank of Japan's new stance. The yield on Japan's benchmark 10-year bond is up almost a full percentage point, to near 2%, in the past year.

Economy Minister Kaoru Yosano said Friday before the decision that ending the 0% policy is the right move. But he urged the BOJ to carefully balance its decision against a possible slowdown in the U.S. economy and recent weakness in the Tokyo stock market. "Zero rates are an exceptional policy," he said at a news conference following a regular Cabinet meeting. "I'm convinced that exiting them is appropriate in terms of direction,"

Finance Minister Sadakazu Tanigaki, meanwhile, had said he expects BOJ policy to "firmly support the economic recovery."

The prospect of higher rates has sparked concern among ruling party officials because they want the BOJ to avoid the mistake it made in August 2000, when it lifted borrowing rates prematurely and choked a recovery.

Reflecting that anxiety, Japanese stocks fell sharply leading up to the decision, falling for a fourth straight session, as investors worried the impact of higher borrowing costs on corporate profits. The benchmark Nikkei 225 stock average had shed 1.2% shortly after the opening Friday on the Tokyo Stock Exchange. In three sessions through Thursday's close, the Nikkei had dropped 2.92%. (Read more coverage.)

Still, the economy is much stronger than six years ago, with corporate profits surging, salaries rising, unemployment falling to eight-year lows and the trend of spiraling price declines largely defeated. Japan's economy has turned in five straight quarters of growth, and forecasts call for up to 3% growth this year.

Raising rates brings the BOJ in line with central banks in the U.S. and Europe, which are also tightening credit. In June, the European Central Bank raised its key interest rate to 2.75%, while the Federal Reserve has lifted its key rate in 17-straight quarter-point increments to 5.25%.

Higher rates make it more expensive for companies to borrow money to fund expansion. They also could cause the yen to appreciate against the dollar because higher interest rates will boost the return on yen-denominated investments. A higher yen, in turn, could hurt Japan's export-driven economy by making its products more expensive overseas.

Proponents of a rate increase say it is needed to head off inflation, now that Japan has defeated years of price declines and has seen prices start climbing again. May's consumer prices rose 0.6% for the seventh monthly gain.

[HenryTo]

Yes - one thing that has been missing from this U.S. housing bubble is yen-denominated mortgages.

My guess is that ST interest rates in Japan will continue to remain low for the next five to ten years - based on slowing productivity growth and deteriorating demographics. So at some point, yen-denominated mortgages just may happen.

[rffrydr]

Now that's a carry trade! I had no idea yen-denominated loans were as big as that.

[HenryTo]

One thing's for sure. BoJ tightening is also going to tighten credit in South Korea:

http://times.hankooki.com/lpage/biz/200607/kt2006071318375411870.htm

[rffrydr]

Time to buy the YEN?

Too obvious? Yesterday favorable structural comments from Finance Ministry giving BOJ greenlight. But talk dwindling to .10 basis point.

BUT Japan a currency TRADER; smells like prepositioning.

[rffrydr]

Bank of Japan hike next Thurs. Again, Fukui wants very incremental move but .25 basis points off zero is HUGE.

US tightening was "ignored" for almost 2 years. It's a different time and a different place but I wouldn't want to be long India now.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

rffrydr,

I wouldn't be too worried about any liquidity spillover effects on the U.S. stock market until the 10-year JGB yield goes over 2%. For now, I am closely watching the Barnes Index.

The latest update has the Barnes Index at 64.40 - very close to our previous "danger zone" of 65 to 70 (which had worked well previously as a timing indicator). Given the current still-oversold condition of our technical and sentiment indicators, I am now going to "upgrade" our danger zone to a level of 70 to 75.

Thanks for "holding up the fort" while I was gone to Austin. I am now back in Houston but will unfortunately have to go back there tomorrow. More on the next msg...

Best regards,

Henry

[rffrydr]

Easy money getting tighter:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAxFRi980rCc&refer=

With Fukui withstanding his "scandal" Christmas delay looks unlikely. Remember a .25% on the Japanese scale is huge.

[rffrydr]

BOJ did same-day drain. First time since April '04. Again a little tighter. Fukui endored by PM--he has the tightest inflationary targets .9-1.5. But we rallied the Nikkei AHEAD of today.

Everything's up: bonds, commodities, gold, dollar. Interesting turn-of-quarter.

[rffrydr]

Bank of Japan Governor Toshihiko Fukui said Tuesday that the economy was moving in line with the bank's forecast, and that any interest-rate adjustments should be made early and in a gradual manner. Analysts interpreted Fukui's comments as hawkish.
"We had been forecasting that the BOJ would wait until August to terminate the zero-interest-rate policy," said Goldman Sachs economist Tetsufumi Yamakawa in a research note Wednesday. "But we are now looking for it to do so at its July 13-14 meeting."

Meanwhile the scandal over his "blind trust" that doubled grows.