Global Briefing: Rare Step Back for Japanese Stocks

Japanese officials appear more concerned about yen strength.
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Global capital markets are beginning the week mixed. Profit-taking hit Japanese shares, while European bourses are mostly higher. Japanese bonds posted minor gains, while European bonds are a touch lower. Initially helped by the threat of official intervention, the dollar gained against the yen in Asia, but reversed course in Europe, where the threat of intervention is not as meaningful. The euro has been unable to sustain the minor upticks seen in late activity before the weekend and is poised to fall to new lows, not only against the dollar but against the British pound as well.

Ideas that emerging Asia and Latin America are on the mend continue to be a dominant theme. Hong Kong stocks rose for the third consecutive session. The Hang Seng's 2.2% rally puts the index at its highest level in 18 months. Tomorrow the government holds its first land auction in a year. The Korean stock market rose 4.2% to reach its best level since August 1997, marking its 13th advance in 14 sessions. Foreign interest was particularly strong, according to reports.

The "recovery story" is helping boost commodity prices in anticipation of increased demand.

In addition to helping commodity prices, it also is lending support to currencies that players perceive to be particularly sensitive to commodities, like the Australian and Canadian dollars. The Australian dollar is approaching its best level of the year, seen near $0.6544. A convincing move above $0.6555 could signal another 4% rise over the next couple of months. At the end of last week, the Canadian dollar rose to its best level since last summer. While the overall trend remains favorable for the Canadian dollar, a near-term consolidative phase is likely. The risk is that the U.S. dollar will rise toward the C$1.4840 level over the next day or two.

Senior Japanese officials' concern about the strength of the yen appears to have risen a notch or two. Earlier today the MOF's

Eisuke Sakakibara

threatened decisive action to stem the yen's rise, which he and

Haruhiku Kuroda

warned was excessive. One indication of the nuanced escalation of the verbal intervention was Sakakibara's comment that the U.S. shares Japan's concern about the yen's rise. In a not-too-subtle way this raises the spectre of a joint intervention operation, like the one conducted last summer to slow the dollar's rise. However, at this stage, intervention, joint or otherwise, seems unlikely.

The yen's rise does not appear to be driven by speculation in the foreign exchange market.

Although Japan enjoys a sizable current-account surplus, which means it exports capital, it is the importation of capital at the present that seems to be a key factor behind the yen's strength. In particular, foreign buying of Japanese equities has helped bolster the yen, while Japanese institutional investors are not as anxious about buying foreign assets.

Also, the unwinding of yen carry trades, in favor of Swiss franc carry trades, entails the buying of yen. This suggests that under current conditions, it will take something more than the jawboning to cap the yen. A break of last Friday's dollar low near 117.45 yen could signal a move toward last month's low, which comes in just below the 117-yen level. On the upside, it still requires a break of the 119.20 level to indicate a low of some significance may be in place.

Foreign purchases of Japanese stocks seem largely a portfolio adjustment rather than real conviction that the Japanese economy has turned.

Japanese officials have repeatedly indicated that although the economy has stopped contracting after five quarters of shrinkage, a genuine recovery remains elusive. The

Bank of Japan

is holding its quarterly branch managers meeting and this is the message emerging. For example, the manager of the Osaka branch, which covers Japan's second-largest industrial area, noted that there is little sign that the region's economy is recovering. In turn this helps ensure that Japanese interest rates will remain low.

The yield on the 10-year benchmark bond slipped 2.5 basis points to 1.58%.

It ought not be surprising to see a modest retreat in JGB bond prices tomorrow ahead of the government's monthly auction of 10-year bonds. The


slipped 1.1% today for only its fourth decline this month, during which it has risen by over 5%. Some reports suggest that some Japanese banks have taken advantage of the Nikkei's rally to unwind some cross-shareholdings. While high-tech shares were undermined by the retreat in the U.S., smokestack industry shares continue to do well. The


index for iron and steel shares rose 2% to bring their 10-day rally to 16%.

European bourses are posting modest gains near midday in London.

There doesn't appear to be an overall feature and the sustainability of the upticks appears to depend on the performance of U.S. shares today. European bond yields are up 2-4 basis points in largely uneventful activity. The benchmark German bund yields have risen 10 basis points over the past five trading sessions, partly being dragged higher by the rise in U.S. yields.

Of particular note, however, is the steepening of the German yield curve. The spread between the two- and 10-year yields has risen to 114 basis points from 106 a week ago and 95 basis points a month ago. A steepening yield curve is sometimes seen as an indication of expectations for stronger growth and/or increasing price pressures. But in the current context, the steepening curve appears to be a reflection of the global recovery story and uncertainty in Europe.

Italy's Treasury Minister Carlo Ciampi warned that the war in Yugoslavia could curb European growth prospects and inject an additional note of uncertainty.

Although he was addressing the euro's weakness, his remarks are applicable to the fixed-income market as well. The

European Central Bank

meets Thursday, but given its recent 50-basis-point cut, no one is expecting a change in policy.

Direct economic news is light and largely limited to the U.K.'s producer price report. The larger-than-expected rise in U.K. producer prices is not a harbinger of higher inflation. Instead, the increase is mostly a result of higher taxes on petroleum and tobacco. For the record output prices rose a seasonally adjusted 1.3% in March, compared to expectations of a 0.9% increase. Seasonally adjusted input prices have fallen 3.7% over the past year.

Note that over the weekend Swiss voters approved constitutional changes that will allow the government to reduce its gold holdings.

The results appear to be somewhat closer than expected as just under 60% of the voters approved the measure. Nevertheless it clears the way for the government, the third largest holder of gold, to sell 1,300 tons -- or roughly 50% of the annual global production. The sales are not expected before next spring at the earliest.

Over the last couple of years countries like Australia, Argentina, Belgium, the Netherlands and Canada have reduced their gold holdings. Together, governments own roughly a quarter of all the gold that has ever been mined. Collectively the market appears to still be bearish on gold. The commitment of traders in the futures market for the first week of April showed that outstanding short positions were 10 times as great as long positions. Gold prices did not show much of a reaction to the Swiss vote as the public's approval of the sales was anticipated.

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, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at