BOJ Less Likely to Raise Rates as Stocks, Prices Fall (Update2)

By Mayumi Otsuma

July 27 (Bloomberg) -- The Bank of Japan is less likely to raise interest rates in August after global stocks slumped and the nation's consumer prices fell for a fifth month.

Investors see a 48 percent likelihood of a rate increase next month, down from 66 percent yesterday, according to Credit Suisse Group calculations based on the exchange of interest payments. Consumer prices excluding fresh food fell 0.1 percent in June from a year earlier, the government said in Tokyo today.

Global stocks slid on concern a worsening U.S. housing slump will slow growth in the world's biggest economy. Bank of Japan Governor Toshihiko Fukui maintained this month that prices will resume rising, though he also said policy makers must be confident economic growth will be sustained before raising rates.

``The heightened concern over systemic risk in the U.S. may make it difficult for the bank to move next month,'' said Eishi Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``The price report won't alter the bank's expectations that prices are going to rise in coming months.''

The Nikkei 225 Stock Average slid the most in more than four months. The Dow Jones Industrial Average yesterday sank the most since February and the FTSE 100's biggest drop in four years led European declines.

Japan's retail sales unexpectedly fell 0.4 percent in June, the Trade Ministry said today, as higher taxes, lower wages and a furor over lost pension records weighed on consumer sentiment.

Weak Data

``Given today's weak CPI and retail data as well as the stock decline in the U.S., there are more factors mounting against an August rate increase,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group in Tokyo. Shirakawa, a former central bank official, said he put the chances of an August rate increase at ``less than 50 percent.''

The yen weakened to 119.12 per dollar at 12:36 p.m. in Tokyo from 118.68 in New York late yesterday. The yield on Japan's 10-year bond fell 5.5 basis points to 1.8 percent, the lowest in seven weeks. The Nikkei tumbled 2 percent.

Concern is mounting that the U.S. housing slump will spread to the rest of the economy, crimping demand in Japan's biggest export market. Sales of new homes in the U.S. fell 6.6 percent last month, the most since January, a report showed yesterday.

``Housing market data has continued to be unimpressive,'' Tadao Noda, a Bank of Japan policy board member, said in a speech yesterday. ``Some have indicated the recovery in the housing market could take more time than initially thought so we need to continue to keep a close watch on this issue.''

Key Rate

The Bank of Japan has kept the key overnight lending rate at 0.5 percent, the lowest among major economies, since February. At the Aug. 22-23 meeting, policy makers will be able to examine the impact of July 29's upper house election, second-quarter gross domestic product and data on output and consumer spending.

``The Bank of Japan is very fortunate because it still has a bit less than one month before the next board meeting,'' said Chotaro Morita, chief debt strategist at Deutsche Securities Ltd. in Tokyo. Financial markets may settle down, allowing the bank to ``pursue its goal of raising rates gradually,'' Morita said.

Industrial production rose for the first time in four months in June, a government report will probably show on July 30, according to economists. Household spending is expected to climb for a sixth month.

Japan's economy grew an annual 1.1 percent last quarter, a third of the pace of the 3.3 percent expansion in the first three months, according to the median estimate of 14 economists. The gross domestic product report is due for release Aug. 13.

Tokyo Prices

Tokyo's core prices, seen as an indicator of the nationwide consumer price index, fell 0.1 percent in July from a year ago, the statistics bureau said in today's report. The drop in prices nationwide and in the capital matched economists' expectations.

Consumer prices in Japan have failed to rise this year, after posting gains in eight months of last year. Those increases led to speculation that the economy was emerging from more than seven years of deflation that discouraged investment and consumer spending.

Nationwide core prices may fall as much as 0.2 percent in August and September because crude oil costs were near records in those months in 2006, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

Competition among mobile-phone operators is also exerting downward pressure on prices. KDDI Corp., Japan's second-biggest mobile-phone carrier, said last week that it will cut monthly fees by half, matching a move by larger rival NTT DoCoMo Inc.

Mobile Phones

Given the mobile-phone prices, the time of the next consumer-price increase ``may be delayed to December from November,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo.

Still, there are also budding signs of inflation, as companies gradually pass rising costs of oil and raw materials onto retail prices. Rengo Co., an Osaka-based paper maker, this week said it will raise prices of cardboard and other paper by at least 15 percent from Sept. 1 to meet higher costs.

Inflationary expectations are increasing amid a surge in gasoline and food prices, according to a central bank survey of consumers. Some 72 percent of consumers expect prices to rise this year, compared with 59 percent in the previous quarter, the bank said in the quarterly report on July 18.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: July 26, 2007 23:42 EDT

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Tokyo Mom and Pop Traders Pass Chicago in Yen Sales (Update3)

By Kosuke Goto

A display of Japanese yen

July 6 (Bloomberg) -- Yen sales by Japanese mom and pop investors this week exceeded professional traders' bets against the currency on the Chicago Mercantile Exchange.

Net short positions on the yen against the dollar, or wagers Japan's currency will fall, reached $1.1 billion among traders using borrowed funds on July 4, according to Tokyo Financial Exchange. Based on estimates of the exchange's market share, the total position of Japanese individual investors is about $19.15 billion, compared with a record $19.07 billion of bets by traders on Chicago's market.

``Retail investors are piling up yen short positions,'' said Tomoko Fujii, head of Japan economics and strategy at Bank of America N.A. in Tokyo. ``It highlights the popularity of currency investment among Japanese individuals, which overseas speculators are increasingly paying attention to.''

Japanese pensioners, businessmen and housewives are taking advantage of the Bank of Japan's 0.5 percent benchmark rate to borrow yen to buy higher-yielding currencies in New Zealand, the U.K. and Australia. The growing popularity of so-called carry trades has added to declines in the yen, which dropped against all of the 16 most-active currencies in the past year.

Japan's currency traded at 123.15 per dollar at 6:30 a.m. in London, down 3.3 percent in 2007. It fell to a record low of 167.46 per euro today. The yen has dropped 13 percent against New Zealand's dollar and 11 percent versus Australia's. New Zealand's benchmark rate is 8 percent and Australia's is 6.25 percent.

Growing Presence

``The yen will fall further due to the growing presence of those Japanese retail investors,'' said Toru Umemoto, chief currency strategist at Barclays Capital in Tokyo. ``Those mom- and-pop investors have invested only 3 percent of their total financial holdings of 1,500 trillion yen in overseas assets. They will invest more.''

The yen may fall to 125 in a month, said Umemoto, the most- accurate yen forecaster last year in Bloomberg surveys.

Futures traders increased short positions, or bets against the yen, to a record 188,077 on June 26, equal to $19.07 billion, figures from the Commodity Futures Trading Commission in Washington showed June 29. The latest figures will be released today.

1 Million Accounts

In Japan, individuals have opened 664,802 margin trading accounts at brokerages that lend money for currency bets, almost double a year ago, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. The number may exceed 1 million by the end of March, said Kaz Shirakura, senior researcher at the institute.

Account balances totaled 613 billion yen ($4.99 billion), up 62.2 percent from a year ago, Shirakura said. Leveraging typically makes their positions 10 to 30 times larger, he added.

The Bank of Japan estimates of the Tokyo futures exchange has a market share of 5.8 percent of margin trades. Japanese brokerages, including online trading Web sites, also channel their currency orders through banks, including Deutsche Bank AG.

Japanese individuals are helping to moderate currency swings by betting against professional investors, Bank of Japan board member Kiyohiko Nishimura said this week.

`Housewives of Tokyo'

``The arrival of Japanese households as major investors seems to have affected foreign-exchange markets,'' Nishimura, 54, said in a speech at a meeting at the Brookings Institute in Washington on July 2. ``The gnomes of Zurich were accused in their day of destabilizing markets. The housewives of Tokyo are apparently acting to stabilize them.''

The ``gnomes of Zurich'' was a term used by U.K. politician Harold Wilson to describe financial speculators based in the Swiss city who were speculating against the pound.

Nishimura went on to highlight the risk of households suddenly changing their investment strategies.

``We do not know how far the contrarian strategies of Japanese retail investors can go,'' Nishimura said. ``A sudden change in their behavior is likely to shift the direction and the magnitude of trading in many foreign-exchange markets.''

Bank of Japan Governor Toshihiko Fukui has warned investors against the risks of one-way bets on currencies and said a sudden reversal of such trades could affect financial markets.

When the carry trade collapsed in 1998 following Russia's debt default, the yen jumped 10 percent against the dollar in two days and ended the year 15 percent higher. The biggest challenge to the strategy this year came when Chinese stocks slumped on Feb. 27, prompting fund managers to cut riskier investments and pay back yen loans. The yen rose 2.3 percent in a single day, the biggest gain since July 2005.

Finance Minister Koji Omi last week said it's ``important'' for investors and traders to realize the risk of making one-sided bets. The Group of Seven nations warned about the risk of trading against the yen in meetings in February and April.

To contact the reporter on this story: Kosuke Goto in Tokyo at at kgoto2@bloomberg.net .

Japan's Business Confidence Holds Near Two-Year High (Update5)

By Lily Nonomiya

Toshihiko Fukui, governor of the Bank of Japan,.

July 2 (Bloomberg) -- Confidence among Japan's largest manufacturers held near a two-year high and companies said they're increasing spending, supporting the central bank's argument for raising interest rates.

The Tankan, Japan's most closely watched business survey, showed sentiment was unchanged at 23 points in June from March and near December's two-year high of 25, the Bank of Japan said in Tokyo today. The result matched the median estimate of 26 economists surveyed by Bloomberg News. A positive number means optimists outnumber pessimists.

Sentiment among service companies held at a 15-year high of 22 points for a third quarter as the export-led expansion created jobs and spurred consumer spending. The report supports expectations the bank will raise its key 0.5 percent overnight rate, the lowest among major economies, as soon as August.

``The survey confirms the healthy sentiment of large companies and solid prospects for the economy,'' said Takehiro Sato, chief economist for Japan at Morgan Stanley in Tokyo. Sato last month brought forward his rate-increase forecast to August.

The yen traded at 122.68 per dollar at 4:42 p.m. in Tokyo compared with 123.09 before the report. The yield on Japan's benchmark 10-year bond rose 2 basis points to 1.885 percent. The Nikkei 225 Stock Average rose 7.94 points to 18,146.30.

The Tankan, which means short-term economic outlook in Japanese, surveyed 10,839 companies from May 28 to June 29, asking them about sales, profit, spending, hiring and confidence.

Rate Increase

Eleven of 17 economists surveyed by Bloomberg last month said the bank will act in August after the government publishes economic growth figures for the second quarter. Others say falling prices and weak production mean Governor Toshihiko Fukui will refrain from proposing a rate increase next month.

Chief government spokesman Yasuhisa Shiozaki said the Tankan shows the economy is recovering steadily. Monetary policy is up to the Bank of Japan, he added.

Large companies said they'd increase capital spending by 7.7 percent in the year ending March 31, less than the 9 percent estimated by economists, though more than the 2.9 percent planned three months ago. Companies boosted investment by 10 percent in 2006, the fastest pace in 16 years.

Prospects for exporters are improving. Concern that the U.S. will lapse into recession has eased and the yen's slide of 4.3 percent against the dollar and 5.7 percent per euro in the past three months bolstered earnings at companies including Canon Inc.

Canon's Profit

Canon, the world's largest maker of digital cameras, posted record earnings in the first quarter, thanks in part to the yen's drop, which accounted for 9 percent of operating profit. Digital camera exports surged 32.6 percent in May, the Tokyo- based Camera & Imaging Products Association said today.

Large manufacturers see the yen trading at an average of 114.4 per dollar for the fiscal year, the Tankan showed. That's little changed from the 114.32 predicted three months ago, even after the currency's decline in the quarter.

Capital spending by large manufacturers is expected to climb 11.2 percent this fiscal year, faster than the 2.5 percent forecast in March, the central bank said.

``Our volume of production is getting better and better,'' said Toshio Maruyama, president of Advantest Corp., the world's biggest maker of memory-chip testers. He cited demand from makers of chips for Apple Inc.'s iPhone and flat-panel televisions ahead of next year's Beijing Olympics.

Labor Shortages

Companies said they were still seeing labor shortages. An index of labor demand among large manufacturers was minus 6 in June, close to March's 15-year high of minus 7. A negative number indicates more companies are short of manpower.

Japan's jobless rate held at 3.8 percent in May, a nine- year low, helping spending by households climb for a fifth month, the longest streak of monthly gains since 2004.

Higher demand at home is encouraging service providers, whose spending has lagged behind manufacturers since 1991, to expand stores and add capacity. Consumer spending and exports drove the economy's 3.3 percent annualized first-quarter growth.

``The good business environment for the manufacturing sector is spreading to the non-manufacturers,'' said Masayuki Kichikawa, a senior economist and currency analyst at Mitsubishi UFJ Securities in Tokyo. The survey result is ``somewhat'' supportive of a rate increase in August, he said.

Takashimaya Co., Japan's largest retailer, plans to spend 26.9 billion yen this year on revamping its stores.

``Service companies are expecting demand to gather momentum and that's prompting them to invest,'' said Naoki Iizuka, an economist at Mizuho Securities Co. in Tokyo.

Price Trends

Some economists say the bank may wait until after August to raise interest rates. Industrial production unexpectedly fell for a third month in May and consumer prices excluding fresh food declined 0.1 percent, a fourth monthly drop. Wages fell for a sixth month, the Labor Ministry said today.

``Given that production and consumer prices reports were weak, we may see the bank wait until after August,'' said Junko Nishioka, an economist at ABN Amro Securities Japan Ltd. ``We're not seeing the recovery spreading to small and medium-sized companies.''

Smaller companies are having a harder time passing on costs amid consumer-price declines, said Yasunari Ueno, chief market economist at Mizuho Securities Co. Sentiment among small manufacturers and service providers both deteriorated, falling to 6 points and minus 7 points respectively. The companies also said they plan to cut spending.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net