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

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Preview – No Interest Rate Hike Expected in the Land of the Rising Sun

The two-day monetary policy meeting of the Bank of Japan is underway. The BOJ is expected to declare its interest rates in the mid Tokyo hours (near 0300 – 0430 GMT) on 15-June. It is widely expected to keep the interest rate (the uncollateralized overnight call rate) unchanged at 0.50%. The last time the BOJ had met was on May 17-18 and had kept rates steady.

The last interest rate change was on 21-Feb-07 when rates by had been raised 25 Bps to 0.50% from the then existing 0.25%. The BOJ is currently in a rates raising cycle starting 14-Jul-06. Rates had been raised by 25 Bps for the first time since 2002 officially ending the BOJ’s “Zero Interest Rate Policy”.

The recent Core CPI (Y/Y) had come in at – 0.1% for April, up from –0.3% in March. The Core Tokyo CPI for May (Y/Y) had come in at 0.0%, unchanged from April. However, the recent growth numbers out of Japan have been encouraging. The Japanese GDP for Jan-Mar 2007 had come in at 0.8%, which translates into an annualized rate of 3.3%, implying that Japanese recovery is well underway.

It is very interesting to watch the behavior of the Japanese Libor rates. The near term 3-month rate has not moved up and is below the March-07 High while the 12-Month Libor rate has moved up sharply, past the March-07 High. This clearly indicates that the markets are expecting unchanged rates from the BOJ for the next few months and then a rate hike later on in the year. The chart of the 3-Month Libor and the 12-Month Libor for 2007 is given below for a better view (see Chart 1).

Japanese Government Bond Yields are rising, in line with the rise in Bond yields globally. The Yield chart (see Chart 2). for the 10-Year JGB in 2007 is given below. The yield has risen from a low of 1.47% in March-07 to 1.98% currently. Note that the BOJ had already hiked in Feb-07. This suggests that the markets are again expecting a hike sometime in 2007.

Most traders might be thinking that since BOJ is expected to hike later on in the year then why is Yen at or near record lows against the EUR and USD. Doesn’t it seem logical that a currency should go up when its Yield goes up? The answer is that Currencies move on Yield Differentials and NOT on Yield themselves. If the market is discounting one rate hike by BOJ while it thinks that US FED or the ECB would hike more than once, then the currency, which is expected to have greater increase in rates, goes up.

With the BOJ very unlikely to raise Interest rate this time around, most of the attention would be on BOJ Governor Fukui’s speech after the meet to search for possible cues as to the official stand on Interest rates.

Technically, USD-JPY is currently in a large uptrend trading at its highest level since June 2002. The next important Resistance comes in at 124.50. On the downside the important short term Support is at 122.30, the level from which the pair broke out a couple of days ago. A “surprise” hint of a rate hike by Fukui could produce a small dip in the pair, towards 122.30 or maybe 121.30.

Technically, EUR-JPY is also in a large uptrend and is currently headed towards 164.60, its record high, which is expected to be tested over the next few days. A move above that (highly possible) would take the pair towards 166.00. On the downside, the short term Support is at 163.10 and then at 162.50. The big long term Support is at 161.10, and buyers are likely to be seen on dips while the larger Support holds.

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