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Japanese stocks at 6-year high; worries persist on weak yen

Investors are optimistic interest rates will stay low. Global speculators hope that's true.

February 14, 2007|From Times Staff and Wire Reports

Japanese stocks rose to their highest level in more than six years Tuesday, led by real estate and steel issues, as the market was cheered by economic data that suggested Japan's central bank may hold off further on raising interest rates.

Many global speculators are sitting on high-risk bets that the Bank of Japan will stay on hold with rates: Tighter credit could wreak havoc with the popular strategy of borrowing in Japan to invest elsewhere.

On the Tokyo Stock Exchange, the benchmark Nikkei 225 index gained 117.12 points, or 0.7%, to 17,621.45, the best finish since May 10, 2000.

The broader Topix index, which includes all shares on the exchange's first section, was up 10.81 points, or 0.6%, to 1,755.90, a nine-month high.

But the weak yen -- increasingly controversial with some of Japan's trading partners -- has cut into those returns for foreign investors in Japanese stocks. For example, the Nikkei is up 2.3% in yen year to date, but it's up just 0.5% in dollars.

Sentiment in the stock market Tuesday was buoyed by Japanese corporate goods price data that showed prices rose in January at their slowest pace since November 2005.

The data suggested Japan doesn't face any immediate threat of inflation that could pressure the Bank of Japan to raise interest rates further. Policymakers made two credit-tightening moves in 2006, including raising their short-term rate from zero to 0.25% in July.

Despite Japan's still-rock-bottom rates, some business leaders fear that tighter credit could stifle the nation's economic recovery.

Fresh data on the economy will be reported Thursday, when the government estimates fourth-quarter gross domestic product growth.

Japan's economy expanded at an annualized 3.8% rate in the quarter, according to the median estimate in a Bloomberg survey of 38 economists. Growth was 0.8% in the third quarter.

Japanese exporters have benefited from continued weakness in the yen, which is at its lowest level against the dollar in more than four years. The yen was at 121.18 per dollar Tuesday in New York. It has fallen from 102 per dollar two years ago.

The yen has been weakened in part by the so-called carry trade: Speculators worldwide have been heavily borrowing in yen at Japan's low interest rates, then investing the proceeds in higher-yielding assets in the U.S., Europe and emerging markets rather than in Japan.

But some European finance ministers say Japanese policymakers also want to keep the yen weak to help Japanese exporters. A falling yen makes Japanese exports more affordable for foreign consumers.

After a meeting last weekend, finance ministers and central bankers from the Group of 7 industrial nations stopped short of calling for a stronger yen, but issued veiled warnings to speculators who are helping to depress the yen with their carry trades.

European Central Bank President Jean-Claude Trichet said the G-7 wanted to advise financial markets against making "one-way bets," a reference to carry trades.

In recent months, some analysts have warned that heavy carry-trade-related borrowing by hedge funds and other investors could cause a global financial explosion if the yen were to strengthen. A reversal in the yen could cause speculators to rush to pay off their yen-denominated loans and sell the foreign securities they bought with the loans.

British investment house Barclays estimates that carry trades are at their most extreme since 1998, when Russia's economic crisis prompted some speculators to unwind their bets so rapidly that the yen soared 20% in a matter of days.

Hedge fund Long-Term Capital Management collapsed in that market turmoil.

Bloomberg News contributed to this report.

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