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Japan Reaffirms U.S. Alliance After Upper House Loss (Update2)

By Keiichi Yamamura and Stuart Biggs

Aug. 3 (Bloomberg) -- Japan reaffirmed its foreign policy and support for the alliance with the U.S. to Deputy Secretary of State John Negroponte, the Japanese government's top spokesman Yasuhisa Shiozaki said.

Shiozaki met Negroponte today and told him Japan's foreign policy wouldn't change, after the government lost control of the Upper House of Parliament in elections on July 29.

``In my meeting with Negroponte, I told him that the government of Shinzo Abe would continue to work to strengthen the U.S.-Japan alliance,'' Shiozaki said. ``I told him that the Upper House election notwithstanding, the foreign policies of the Abe administration would basically remain unchanged.''

The Democratic Party of Japan now has the most seats in the Upper House and will oppose Prime Minister Abe's plans to allow Japan's navy to continue to support the U.S. in the Indian Ocean for the war in Afghanistan, the party's leader Ichiro Ozawa said on July 31.

While the LDP continues to hold a two-thirds majority of the Lower House of Japan's Parliament, it will now have to negotiate on legislation with the DPJ-controlled Upper House. The anti- terrorism law that provides for the Japanese navy's operations comes up for renewal in November.

``To interrupt these operations probably would negatively affect our efforts to prevent terrorism and prevent the passage of undesirable products and people through that area,'' Negroponte said at a press conference in Tokyo today.

Seeking Understanding

Ozawa refused to meet U.S. Ambassador Thomas Schieffer to discuss the extension of the legislation, the Asahi News said yesterday, citing unidentified people familiar with the matter.

Schieffer denied the DPJ had refused a meeting. U.S. Embassy Spokesman Jeffrey Hill said Schieffer will meet Ozawa next week.

``Abe had said he would seek the understanding of the opposition parties with respect to the special anti-terrorism law, because it's a basis through which Japan responds to the expectations of the rest of the world,'' Shiozaki said.

Defense Minister Yuriko Koike asked Negroponte for the U.S. to help Japan in choosing its new fighter aircraft, the ministry said. She met Negroponte after Shiozaki.

Japan is expected to choose a replacement for its F-4 Phantom fighter next year.

The government is considering buying the F-22 Raptor, built by a Lockheed Martin Corp.-led consortium, Boeing Co.'s F-15 and F-18 and Eurofighter GmbH's Typhoon, the Financial Times reported on May 15.

A U.S. House committee last week decided to maintain a prohibition on exports of the Raptor.

To contact the reporters on this story: Keiichi Yamamura in Tokyo at kyamamura@bloomberg.net .

Last Updated: August 3, 2007 05:55 EDT

Yen Falls Versus Euro on Increasing Demand for Riskier Assets

By Kim-Mai Cutler

A woman arranges Japanese currency.

Aug. 2 (Bloomberg) -- The yen declined against the 16 most- actively traded currencies as demand for riskier assets funded by loans in Japan increased.

The Brazilian real gained 1.2 percent versus the yen, which declined for a second day versus the dollar and euro. Investors sold the Japanese currency to buy assets in countries with higher interest rates in a practice known as the carry trade. Japan's 0.5 percent borrowing costs are the lowest among major economies.

``There has been a pretty distinct appetite for putting back on high-yielding trades and selling low-yielding currencies like the yen,'' said Richard Franulovich, a senior currency strategist in New York at Westpac Banking Corp.

The yen declined 0.3 percent to 163.09 per euro at 2:38 p.m. in New York. The Japanese currency traded at 119.13 per dollar, from 118.96 yesterday.

The yen declined as most U.S. stocks gained after consumer and media companies' earnings beat analysts' estimates.

``The rise of U.S. stocks is somewhat supportive of risk appetite, and we've seen the yen come off its rally as risk aversion eases,'' said Omer Esiner, an analyst with currency- trading company Ruesch International Inc. in Washington.

The yen advanced 2.7 percent last month versus the euro, the most since February 2006, and 3.7 percent against the dollar, the biggest increase since October 2004.

Stocks Gain

The Dow Jones Industrial Average climbed 0.2 percent to 13,389.85.

The carry trade has weakened the yen 3.7 percent this year against the euro as investors took advantage of Japan's borrowing costs. Japan's benchmark interest rate compares with 5.75 percent in the U.K., 5.25 percent in the U.S. and 8.25 percent in New Zealand.

New Zealand's dollar has increased 28.2 percent against the yen over the past 12 months.

The dollar weakened 0.2 percent against the euro on speculation a government report tomorrow will show U.S. companies added fewer jobs in July. The Labor Department may say the number of non-farm jobs rose by 127,000, down from 132,000 a month earlier, a Bloomberg News survey of economists shows. The jobless rate is forecast to stay at 4.5 percent.

``If the number's a disaster for the U.S. economy, it would cause everything to rally against the dollar,'' said Greg Anderson, senior currency strategist at ABN Amro Bank NV in Chicago.

A private report based on payroll data yesterday showed companies in the U.S. added the smallest number of jobs in four years. ADP Employer Services said companies added 48,000 jobs in July, less than half the 100,000 gain forecast according to the median estimate of 20 economists surveyed by Bloomberg News.

ECB Holds Rates

European Central Bank President Jean-Claude Trichet signaled interest rates will rise in September from a six-year high.

Trichet said ``strong vigilance'' is needed to guard against inflation, indicating the benchmark will rise from 4 percent.

``This puts a floor on the euro-dollar,'' said Matthew Kassel, director of proprietary trading in New York at ING Financial Markets LLC. ``It puts September on for the next rate hike.''

The euro traded at $1.3688, from $1.3667 yesterday.

``Rising oil prices, emerging capacity constraints and the potential for stronger wage dynamics imply upside risks to price stability,'' Trichet said at a press briefing in Frankfurt today after the bank left interest rates unchanged, as forecast. He has used the term ``vigilance'' in past statements to indicate a rate increase is imminent.

The currency may extend this year's 3.7 percent advance against the dollar as interest-rate futures show investors are betting the ECB will lift rates at least once more this year.

The implied yield on the December Euribor futures contracts rose to 4.51 percent from 4.48 percent yesterday. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.

To contact the reporter on this story: Kim-Mai Cutler in New York at kcutler@bloomberg.net

Last Updated: August 2, 2007 14:40 EDT

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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