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Japan may share blame in stock dive

Rate hikes have spurred speculators, who borrowed yen to invest elsewhere, to sell assets.

March 06, 2007|Bruce Wallace | Times Staff Writer

TOKYO — China was widely blamed for triggering the wild gyrations in world financial markets last week, but some analysts say part of the fault lies here -- with Japan's attempts to return to economic normalcy.

Rock-bottom interest rates in Japan have helped fuel years of speculation by global investors, who have borrowed here to invest elsewhere.

That borrowing also has depressed the value of the yen, helping Japanese exporters such as Toyota Motor Corp. and Sony Corp.

Now with its economy improving, Japan's interest rates are going up. The result is the beginning of a squeeze on speculators -- and a sudden rally in the yen that could hurt the nation's exporters.

The Bank of Japan raised its benchmark short-term interest rate to 0.50% from 0.25% on Feb. 21, six days before the 8.8% dive in the Shanghai stock market that sparked selling worldwide.

"The global meltdown was triggered by the Bank of Japan's decision to hike rates," asserted Hiromachi Shirakawa, chief economist at brokerage Credit Suisse Japan.

Other analysts said that the move in Japanese interest rates was just one factor in markets' recent turmoil, but that the shift was likely to have long-lasting implications.

The yen has strengthened sharply over the last week, from 121 per dollar to 116.37 on Monday. In the same period Japan's Nikkei 225-stock index fell 8.6%, including a decline Monday of 575.68 points, or 3.3%, to 16,642.25.

Early today Asian markets were rebounding, lifting hopes for at least a temporary respite. The Nikkei index was up 1.4% at midday. The Shanghai index was up 0.5%, and the yen weakened slightly.

New Japanese economic data showed business capital spending rose strongly in the fourth quarter, which analysts said might mean the economy overall grew even faster than the 4.8% annualized rate the government estimated last month.

But that could put more pressure on the Bank of Japan to continue raising interest rates.

The central bank is caught between competing responsibilities. Some critics at home say that, despite the apparent economic rebound, policymakers should keep rates low to damp the risk of a reversal. Also, rate increases make it more expensive for the government to service its enormous debt.

At the same time, government officials have acknowledged the risks posed to world markets from global speculators' use of low-rate loans in Japan to fund investment purchases elsewhere, including across Asia's emerging stock markets.

The unwinding of some of those speculative trades last week contributed to heavy selling in emerging-market stocks and other assets, analysts say. And as speculators sold investments and bought yen to repay their loans, they helped drive up the currency's value -- which in turn means other yen borrowers face the costly prospect of repaying their loans with weaker currencies, such as the dollar.

For Japan's export giants, at some point a stronger yen could hurt profit unless they raise prices.

Merrill Lynch & Co. analyst Masatoshi Kikuchi, in a report Monday, said many Japanese companies assumed a yen rate of 115 per dollar in their near-term earnings forecasts. If the yen strengthens beyond that, it "should lead to a downward revision of earnings," he said.

Although a stronger yen could be bad for Japanese exporters, it could be welcomed by U.S. competitors.

Japanese Finance Minister Koji Omi, after meeting with U.S. Treasury Secretary Henry M. Paulson Jr. here Monday, sought to downplay market jitters.

He said he and Paulson agreed that "both the United States and Japanese economies are moving smoothly."

As for the yen's surge, Paulson said that "the yen is market-determined, and that's the way it should be."

bruce.wallace@latimes.com

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Reuters was used in compiling this report.

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