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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7391)	6/22/2006 6:20:36 PM
From: John Pitera	Respond to of 33421

The big Picture - BIS says Yen-denominated claims rose noticebly in Q4 of 2005. UBS highlights unwinding of carry trade will be a key driver of Currency Volatility in Q3 & Q4 of 2006........... --------------------------- 'Yen Carry' Could Become Burden for World Markets Some Fear Tumult If Japan Lifts Rates; Incomplete Evidence By PATRICK BENNETT June 22, 2006 SINGAPORE -- Many foreign-exchange traders worry that an increase in Japanese interest rates as soon as next month could spark a massive unwinding of so-called yen-carry trades, rattling financial markets around the world. But a few analysts say they can find little evidence to support such a scenario and that the market's fears may be overblown. "Every hedge-fund investor assures me that these carry trades are massive, but I am yet to find one hedge-fund investor who himself runs such a position," Stephen Jen, Morgan Stanley's head of currency research, said in a recent report. With yen-carry trades, foreigners borrow yen at near-zero interest rates to fund investments in markets around the world. But there isn't a clear consensus on the volume of these trades, and therefore there is great uncertainty about the market dislocation that would be caused if they were quickly unwound. A Bank for International Settlements report published earlier this month and renewed expectations that the Bank of Japan will raise interest rates in July or August for the first time in six years have revived the focus on yen-carry trades. The BIS, an international organization that fosters cooperation among the world's central banks, said in its quarterly report that "outstanding yen-denominated claims rose noticeably in the fourth quarter of 2005, in line with a trend evident since mid-2004." "This pick-up in yen borrowing provides some evidence, albeit incomplete, of a rise in yen-funded carry-trade positions," the BIS said. Many analysts say the BIS report supports assumptions of large yen-carry trades. Higher Japanese interest rates would increase the cost of these trades, making them less attractive, they argue. They say that unwinding these trades could sharply increase the value of the yen as the funds are removed from global asset markets and swapped back into yen to repay the loans. UBS estimates that "yen-funded carry trades that are vulnerable to higher rates amount to at least 17 trillion yen"; that would be about $148 billion at current exchange rates. Unwinding of these trades is "likely to be a key driver of [foreign-exchange] volatility throughout the second half of 2006, as the [Bank of Japan] tightens rates," said Ashley Davies, UBS currency strategist. But Morgan Stanley's Mr. Jen says evidence of a recent sharp rise in yen-carry trades isn't strong. "There are many reasons why cross-border bank loans are extended. The evidence for carry trades is circumstantial at best, because yen loans may or may not have increased," he said. The BIS quarterly report shows a $161 billion rise in outstanding yen-denominated claims by Japanese and non-Japanese banks during seven quarters through the fourth quarter of 2005, including a rise of $92.7 billion in the final quarter of last year. Mr. Jen says this increase doesn't necessarily mean foreign investors are borrowing large amounts for yen-carry trades. Foreigners' carry trades that are funded by borrowing from Japanese banks should appear as yen-denominated, cross-border loans extended by Japanese banks. But Mr. Jen says this category of loans has declined in recent quarters, "suggesting there was no increase in carry trades in recent quarters." Write to Patrick Bennett at patrick.bennett@wsj.com1 ------------------------------------------ I have an area which I disagree with Mr. Jen. Hedge Funds and other financial firms can borrow money in Yen from a Japanese subsidary or a bank or company doing business in Japan and then engage in a futher transaction to convert the money to another currency and move it offshore. JP

To: John Pitera who wrote (7391)	6/26/2006 11:43:35 AM
From: Hawkmoon	Read Replies (2) \| Respond to of 33421

The central bank appears concerned about the prospect of excessive capital spending, which "would raise the probability of an interest-rate increase in July if capex comes in above expectations in the tankan," said Yasuo Yamamoto, senior economist at Mizuho Research Institute. This will be interesting to observe. The Japanese Government has been propping up the economy for years while their companies cleaned up their balance sheets. Richard Koo, who wrote a fine book on this balance-sheet recession in Japan stipulated that one of the things required to restore the balance is some form of economic shock therapy, where there are time and demand driven "surges" that place stress on the existing economic infrastructure and force capital expenditures. And 8% growth from negative growth is a major surge... However, these capital expenditures must produce greater productivity in return, or they will mean nothing over the long-term. Hawk

To: John Pitera who wrote (7391)	7/10/2006 10:14:03 AM
From: John Pitera	Respond to of 33421

Japan's ZIRP -- Japan's Yosano:Time to discuss zero rates end Monday, July 10, 2006 4:30:06 AM (GMT-06:00) Provided by: Reuters News (Adds quotes, details) By Yuko Yoshikawa and Tamawa Kadoya TOKYO, July 10 (Reuters) - The time is more than ripe to discuss ending the Bank of Japan's zero interest rate policy, and halting the policy would remove an uncertain factor from the market, Japanese Economics Minister Kaoru Yosano said on Monday. In an interview with Reuters, Yosano also said he saw no need now for the government to ask the central bank to delay a decision to end zero rates. Two government representatives can sit in on the BOJ's policy-setting meetings. They cannot vote but can ask the BOJ to delay a policy decision. "The environment for discussing the lifting of the zero interest rate policy is more than ripe," Yosano said. "Whether it is July or August, there is not much difference." "It is up to the BOJ to decide whether conditions are in place, after throughly reviewing them," he said. Markets largely expect the BOJ to raise interest rates from zero for the first time in six years on Friday when it ends a two-day policy board meeting, hiking the overnight call rate to 0.25 percent. A Reuters poll showed last week that 32 of 41 analysts and traders said they expected a July hike. "The markets have factored in that the end of zero rates is near," Yosano said. "The BOJ also needs to check that when it makes its decision." Yosano, who has been more favourable than other ministers towards the BOJ's ending its zero rate policy, added, "To ask for a delay would be for the government to exert large force. I can't imagine the need to use such force." The government refrained from asking the BOJ to delay its decision when the central bank ended its super-loose "quantitative easing" policy in March. But the last time the BOJ raised interest rates, in August 2000, the central bank overrode a government request to delay its decision. It was subsequently blamed for an economic slowdown as the rate increase came shortly after the bursting of the information technology "bubble" in the United States. GRADUAL MOVES On monetary policy going forward, Yosano said the markets should heed the BOJ's calls that it will move gradually to normalise interest rates. He also said the BOJ must ensure that it communicates well with the market to avoid causing uncertainty. The Reuters poll showed many market participants expect the central bank to follow its first move with another rate hike by next March. The BOJ has said that monetary conditions would remain easy even after it ended zero rates, and that it could take its time. On Japan's economy, Yosano said there were few risk factors stemming from the domestic side and it was desirable for the economy to continue growing near its current pace of around 2 to 3 percent. "What is most desirable is to have as few fluctuations as possible, both good and bad," he said. ((Editing by Mike Miller; Reuters Messaging: tamawa.kadoya.reuters.com@reuters.net; tamawa.kadoya@reuters.com; +81-3 3432 8656)) Keywords: ECONOMY JAPAN YOSANO --------------- BOJ TIGHTENING Japanese politicians have been sending mixed signals on interest rates. Yosano said ending the zero rate policy would remove an uncertain factor from the market. A senior official of Japan's ruling Liberal Democratic Party was quoted on Monday as saying it was up to the BOJ whether to raise interest rates from zero. But government spokesman Shinzo Abe said the bank should continue to leave rates at zero to support the economy. Barclays said even if the BOJ ends the zero rate policy this week, bank lending could continue to expand rapidly due to a time lag between a rate hike and its impact on credit creation. "The monetary condition could remain accommodative even after the (zero rate policy) termination. Therefore, the yen could depreciate due to rapid credit creation in the near future," it said in a note to clients. Some analysts said the yen, which is often traded as a proxy for the yuan, was likely to be firm in the lead-up to the one-year anniversary of China's July 21 currency revaluation. In the euro zone, investors are focused on the Eurogroup of euro zone finance ministers and European Central Bank officials which meets at 1700 GMT in Frankfurt. The ECB last week held rates at 2.75 percent, as expected, but President Jean-Claude Trichet said the bank would "exercise strong vigilance" -- phrasing which was interpreted as signalling a rate hike on Aug. 3. ECB Executive Board member Jose Manuel Manuel Gonzalez-Paramo said euro zone inflation is likely to remain above 2 percent for some time. FED OUTLOOK UNCLEAR After the weaker-than-expected U.S. jobs data on Friday, interest rate futures markets showed investors' expectations the Fed will raise rates in August dropped to a 62 percent chance after the data was released, from 70 percent beforehand. The figures highlighted concerns about a slowdown in the U.S. economy, though dealers said a big gain in wages left inflation concerns intact. Henry Paulson will be sworn in as U.S. Treasury Secretary at 1500 GMT, replacing John Snow. Investors will be looking for more clues on his stance on the dollar.