FOCUS: Inaction prods Japan to get double-whammy of strong yen, stock falls+

TOKYO, Aug. 24 Kyodo -
Japanese authorities' inaction to stem the yen's recent advance spooked
investors worried about its impact on the export-reliant Japanese economy as
the Nikkei stock index ended at a 16-month low below the key 9,000 mark and the
yen spiked to a fresh 15-year high.
Disappointment came as much-hyped talks between Prime Minister Naoto Kan and
Bank of Japan Governor Masaaki Shirakawa on Monday ended up confirming only
that they will work closely, rather than taking steps to counter the yen's
advance as financial markets had expected.
The fact that the premier and the BOJ chief did not talk about currency
intervention did not help the mood.
There is also a market perception that even if they do act, options are likely
to be limited ahead of a scheduled election next month to pick the governing
Democratic Party of Japan's new leader. What financial markets awaited,
however, was action, or willingness at least, to rein in the yen's uptrend,
analysts said.
Their failure to come up with specific measures reminded the market that ''any
important decision-making would be difficult on the political front before the
DPJ's presidential election,'' scheduled for mid-September, said Masafumi
Yamamoto, chief foreign exchange strategist at Barclays Bank in Tokyo.
The next DPJ leader is almost certain to be Japan's prime minister as the party
controls the more powerful House of Representatives. DPJ lawmakers who are
critical of Kan are trying to field a rival candidate against him, with
intraparty maneuvering apparently going on.
The yen has been gaining due also to mounting worries about the global economic
recovery that have prompted investors to seek the yen, as a spate of recent
economic data came in below forecasts.
The yen is perceived as a safer bet as Japan's financial sector was not as
damaged as its counterparts in the United States and Europe during the
financial crisis since the collapse of Lehman Brothers Holdings Inc.
It is also reflective of a difference in stance toward monetary easing among
authorities in the United States, Europe and Japan, analysts said, making it
difficult for the Japanese side to act on its own.
''The buzz word seems to be sort of like an implicit competition among nations
to weaken their currencies (to support their economies),'' said Tsuyoshi
Segawa, equity strategist at Mizuho Securities Co.
''I understand that since the pace of the yen's strengthening is relatively
gradual, we haven't come to a point where the government and the BOJ think the
yen's advance is rapid...but the outcome (of the talks) could be taken as a
message that Japan will accept what the United States and Europe do, and stand
still,'' he said.
The U.S. Federal Reserve recently decided to reinvest the proceeds from
maturing mortgage-backed securities into U.S. government bonds in a shift from
seeking an exit from extraordinary steps taken to ride out the recent financial
crisis.
In Europe, European Central Bank Governing Council member Axel Weber said
recently that the central bank should extend its loose monetary policy.
That helps weaken the dollar and the euro relative to the yen but a stronger
yen can be detrimental to Japan as it hurts Japanese exporters because their
profits would be eroded when brought back home, and thus prices of their shares
that play a major part of the Tokyo market.
Brokers said stocks are seen as undervalued, given that Japanese companies
released generally strong earnings for the April to June quarter, but the yen's
strength has been a major drag.
A day after the talks between Kan and Shirakawa ended, the Japanese government
reacted calmly to unsettled financial markets. Chief Cabinet Secretary Yoshito
Sengoku said the government is ''closely watching market developments,'' and
said its perception of financial markets and the global economy has not
''changed at all.''
The Nikkei ended Tuesday at 8,995.14, the lowest closing level since May 1 last
year, while the dollar fell to as low as 84.45 yen, a fresh 15-year low during
Tokyo trading hours. Major Japanese manufacturers have set their assumed
exchange rate at 90.18 yen for the business year from April, according to the
BOJ's latest quarterly Tankan survey.
Although analysts said there is still a possibility that Japanese authorities
could take action alarmed by the Nikkei's fall below the psychologically
important 9,000 mark and the dollar falling below the 85 yen line, as they did
when the Dubai shock rattled global financial markets, inaction so far has
encouraged investors to test Japanese authorities' tolerance.
Finance Minister Yoshihiko Noda said Tuesday evening that currency moves are
''obviously one-sided'' without indicating any immediate policy response.
With all these factors accelerating the momentum for investors to pile into the
yen, the focus is now on the state of the U.S. economy amid investor concern
that the economic recovery is faltering, and possibly heading for a double-dip,
now that fears about the debt crisis in Greece abated.
Toshikazu Horiuchi, equity strategist at Cosmo Securities Co. said the U.S.
economic outlook will remain a key factor in determining the yen's moves
against the dollar and Japanese stocks, and a series of upcoming data need to
come in above market expectations to change the downbeat sentiment.
''Investors are supersensitive to risk,'' Horiuchi said. ''Above all, there are
still scars to be healed left by the Lehman shock because when something (bad)
happens it triggers a quick flight from risky assets.''
==Kyodo
2010-08-24 23:15:28