*Extra* Global Briefing: Yen Keeps on Rising

Nonchalant Japanese officials have the yen appreciating even as stocks and bonds are on the retreat.
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Stocks are mostly lower, but the key development is the renewed strength of the yen.

For the third consecutive session the yen is rising in value. Today that move accelerated as the dollar fell below 113 yen at one point before stabilizing in midmorning European trading. The yen's appreciation is not reflective of newfound confidence in the Japanese economy or asset markets, as both stocks and bonds fell. Since testing the 117 level against the yen in the middle of last week, the dollar has faced increased talk of selling by Japanese exporters.

The ostensible trigger of today's move was the nonchalant attitude of Japanese policy makers. Japan's

Sakakibara

warned of rising trade frictions with the U.S. The market frequently interprets U.S.-Japanese trade tensions as a reason to buy yen because of the implicit risk that U.S. policy makers will use the dollar as a trade weapon. However, since

Rubin

took the helm of Treasury from

Bentsen

, the U.S. disavowed using the dollar to adjust the trade imbalance. The current team at the Treasury is too results-oriented to rely on the foreign-exchange market to bring the trade account into better balance. That model simply has not worked over the years.

With Japanese bonds already under pressure, Finance Minister

Miyazawa's

comments added fuel to the selloff. Miyazawa reportedly indicated he was not concerned with the increase in long-term bond yields. This gave the market a green light to sell Japanese government bonds. The yield on the benchmark No. 203 bond rose 28 basis points to 2.31%. The rising bond yields hurt Japan on two counts. First, the higher yields are an obstacle to renewed growth. The Japanese economy has contracted for four consecutive quarters. Second, the higher yields mean the government bond holdings by Japanese banks and life insurance companies have lost value. Japanese financial institutions first lost their unrealized profits on stocks. Now reports suggest they have lost the unrealized profits on their bond holdings.

Fear of intervention to support the dollar is helping to stabilize the yen currently, but intervention in the U.S. session today is unlikely.

Nevertheless, the market may get a scare later this morning. The

Federal Reserve

often checks foreign exchange prices shortly before the stock market opens and sometimes, when anxiety levels are running high, people confuse the rate checks as a tip off for intervention. Initial dollar support is seen near 112.50-112.75 yen. A break of this level could see a quick push toward the 111.50 level. The closer the dollar is to the 110-yen level, the more the market will be wary of

Bank of Japan

intervention tomorrow.

Of other interest: The Federal Reserve begins its two-day meeting today. Practically no one expects the Fed to ease. There has been some discussion of the likely policy bias, but the Fed's bias has been a poor indicator in recent years of the direction of the next move in interest rates. Lastly, the Brazilian real has begun showing signs of stabilizing. The market is coming around and seems to have begun to accept at face value the government's pledge not to institute capital controls. Still, the government raised overnight interest rates to 39.6% yesterday from 38% on Friday. This effectively raises the cost of financing the government's debt. Officials will be looking for any opportunity to lower interest rates. Further gains in the real over the next couple of days could prompt a small preliminary rate cut next week.

Marc Chandler is an independent global markets strategist. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to mchandler@erols.com.