Yen Weakens, Nikkei Higher in Asian Trading

How Did the Markets React? 

Economic data out of Japan indicated once again that significant price pressures have yet to come to fruition, as the corporate service price index fell to 0.1% year over year in October. The CSPI figure has been moderating since peaking at 0.4% in August, which had signaled the first annualized increase in eight years. While transportation costs kept the index in positive territory, dwindling real estate prices exerted a downward pull on the report. Nevertheless, Bank of Japan Governor Toshihiko Fukui has remained resolute in his hawkish stance and said just this morning that “Japan's economy has been expanding for a long time. The threat of a deflationary spiral is gone and some land prices in major cities are rising, showing that economic conditions are a lot different from several years ago.” Mr. Fukui also reiterated that the BOJ will adjust rates gradually, but refrained on commenting on any sort of timing, leaving the door open to a December hike. However, given the persistent weakness of household spending and tepid CPI expectations due out later this week, it is far more likely that the BOJ will hold off until the first quarter of 2007. As a result, the FX markets have found yen weaker after USD/JPY hit three-month lows this morning of 115.37. Meanwhile, JGB price action ran counter to the Nikkei’s gains, as the Japanese benchmark equity index closed 1% higher today.






Japanese 10-Year Government Bonds

With both Japanese and US traders on break last week for holidays on Thursday in both countries, fixed income trading has been very light, as yields on 10-year JGBs have held in a two basis point range during the past two trading sessions. Today, prices ignored Japanese economic data and instead moved counter to equity market strength, weakening slightly by .077 to 101.24 and sending yields up to 1.653%. JGB price action in the week going forward could be highly dependent on the results of Tokyo and National CPI due out on Thursday at 23:30GMT, with both headline reports anticipated to show inflation holding steady on an annual basis, but weakening for the month. As a result, yields could decline as the potential of a December hike by the BOJ continues to diminish.






FX – USD/JPY

After racking up nearly 1.7% last week, yen gave up some of its gains once the currency hit a three month low of 115.37 against the dollar this morning. The USD/JPY pair has also encountered significant support from the 200 SMA, which currently sits at 116.17. A close below that level today may indicate further yen appreciation, but given the recent weakness in economic data, gains for the Japanese currency could be limited. Today’s CSPI release highlighted the tepid price pressures in the economy, which has kept the hawkish BOJ from raising rates again after July’s 25 basis point hike on the fear of triggering yet another contraction in Japanese economy. However, USD/JPY action this week may be more dependent on data out of the US and results in an upside bias for a continuation of the yen rally.






Equities – Nikkei 225 Index

Japanese equity markets closed higher today, with the benchmark Nikkei 225 average up 1% to 15,885.38. Gains in domestic-oriented stocks offset declines in top exporters, which dropped on the USD/JPY pair’s fall to a three-month low, as a stronger yen adversely impacts profits made overseas. Toyota, the world’s second-biggest carmaker, slipped 0.2% to 6,880 yen while rival Honda Motor closed 0.5%lower at 4,040 yen. Meanwhile, shares of chemical-maker Tosoh jumped 5.8% to 513 yen, making it the biggest percentage gainer on the Nikkei. Tosoh announced that the firm has developed a low-priced zinc product that can be used in the making of LCD panels as a replacement for more expensive iridium.