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Global Briefing: Japanese Keep Talking Down the Yen

But Rubin's comments offer a stark contrast.

Japanese officials continue to talk down the yen, and the market is only too happy to comply.

The dollar has approached the 120-yen level, where rumors suggests stops and a number of second-generation options have been struck, which, if triggered, could further extend the dollar's gains. Some players are looking for a move toward the 123.50-yen area, which corresponds to a 38% retracement of the decline from last summer's high set near 147.60 yen.

Japan's vice finance minister


gave his blessing to the yen's recent decline, suggesting that it was fundamentally driven. The market took his comments to mean that Japanese officials will not object to additional yen weakness.


, whose views are often echoed by policy wonks, indicated that the

Bank of Japan

is committed to pumping more liquidity into the system. The easing of monetary policy at the end of last week appears to be larger and more significant than the market initially understood.

While some cynics may argue that Japanese officials are simply trying to "goose" the market ahead of the end of the fiscal year, there are some signs that these changes may carry over into the new year. For example, a Japanese newspaper reported that the

Ministry of Finance

may reduce the amount of 10-year bonds it plans to auction in April. Last week, the MOF announced it would reduce the supply of 10-year bonds it intended to sell this month and next. The yield on the benchmark bond, which matures in 2008, fell another 8 basis points to 1.875%. The first real test of the newfound bullish sentiment toward Japanese government bonds comes next Tuesday, when the government sells 1.4 trillion yen of 10-year bonds. Meanwhile, the weighted average of the unsecured overnight call rate firmed slightly to 0.10% from 0.08% yesterday. The rate cut announced last week places the ceiling on this rate at 0.15%.

The dollar's technical tone against the major European currencies is not as constructive as it is against the yen.

Momentum indicators of the dollar against the German mark and Swiss franc are showing modest bearish divergences, which would appear to be warning of a continuation of the consolidative phase or even an outright correction. Even though




did not repeat his mantra yesterday that a strong dollar was in U.S. interest, his comments did offer stark contrast with official comments from Germany, the U.K. and Japan, all talking their currencies down.

An I.G. Metall strike in the German state of Baden-Wuerttemberg has been averted at the last minute.

The agreement includes a 3.2% wage increase over a 14-month period starting next month, a 1% bonus not linked to profits and a one-time 350-mark payment to every worker for back pay since the last agreement expired in December 1998. These results are closer to the union's liking than employers', and the union will recommend that it serve as the benchmark for negotiations in other states. The employers do not seem particularly pleased and have warned that the agreement will result in new efforts to cut jobs. In particular, the fact that the bonuses are not linked to profits and the union's desire to continue pattern bargaining are viewed by employers as a setback in efforts to make the German labor market more flexible.

It is not immediately evident why the


should care how the productivity gains are divided between workers and employers, but it is. In its February report, the German central bank warned that wage hikes (and federal tax policies) would undermine growth. In defending the

European Central Bank's

reluctance to reduce interest rates more aggressively, the bank argued that interest rates are already low enough as not to pose an obstacle to growth. While acknowledging that the economy probably contracted in the fourth quarter, the Bundesbank said a recession this year should be avoided. It suggested that strong bank lending also means that deflationary forces will be kept in check.

Speaking before the

European Parliament

prior to attending the ECB meeting, German Finance Minister


repeated his call for lower rates. While nominal rates are indeed low, Lafontaine argued that real (adjusted for inflation) interest rates are too high. Market participants doubt that the ECB will be swayed by Lafontaine's arguments.

The U.K. reported stronger-than-expected retail sales today.

Led by heavy discounting of household goods and clothing, retail sales rose 1.1% in January, completely reversing the revised 0.8% decline posted in December. While U.K. debt instruments are firm, some market participants have begun reassessing their outlook for the next monetary policy committee meeting early next month. The BOE has reduced rates five times in as many months.

Barring a horrific producer price inflation report in the U.S., Treasury prices will likely continue to recover from the slide at the end of last week.

The March bond gapped lower last Friday and has spent this holiday-shortened week trying to fill that gap. It extends to 124-11. Additional resistance is seen near 124-16 and then 125-08. European bonds, meanwhile, are being tugged higher by the rally in U.S. Treasuries and Japanese bonds.

Marc Chandler is an independent global markets strategist who writes daily for 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 at