Carry Traders Come Back Home, Nikkei suffers from the US Woes

The comments about the risks of making one way bets from Finance Minister Omi caused carry traders to pare back their positions strengthening the yen. Bad news from the US has dominated the Japanese capital markets, where bonds gained and Nikkei took a deep dive. While the government remained optimistic about the economic recovery, analysts and investors disagreed, which spilled into a worse small business sentiment figures.

[B]BOJ Inoue Sees ‘Huge Amount? of Capital Flows Leaving Japan[/B] - The BOJ official Tetsuya Inoue stated yesterday that a massive capital outflows are anticipated, as households will seek to diversify their portfolios. Finance companies will unload some 1 trillion yen of foreign-currency investment trusts before the end of June, when workers will get their summer bonuses. [I]Source: Bloomberg[/I]
[B]Japan retail sales unexpectedly rise in May[/B] - The Japanese retail sales have surpassed expectations in May, printing 0.5% increase versus 0.4% previous and expected figures. However, some analysts worry that the corporate activity might be losing momentum as the weaker US exports have been hurting the industrial output in the recent months. The government remains optimistic and stated that Japan?s economic recovery remains strong despite weaknesses in output. [I]Source: Reuters[/I].

[B]TOKYO: Jasdaq ordered to guard against glitches[/B] - The computerized trading system of the exchange for start-up companies was found inadequate to prevent problems according to a report by the Securities and Exchange Surveillance Commission. Financial Services Agency ordered Jusdaq to submit a detailed report that would specify how the exchange will combat the technical difficulties. [I]Source: Asahi Shimbun.
[/I]The Asahi Shimbun
The yen was little moved by the higher than expected Retail Trade figures that printed 0.5% versus anticipated 0.4% for the may. Investors as well as some analysts and businesses started questioning the prospects of Japanese growth as the industry output have been hurt by falling US exports. While government remained optimistic, the Small Business Confidence printed 48.9 below the previous and expected 49.3, further away from the benchmark of 50 points that signals expansion. At the same time, carry traders paid attention to Finance Minister Koji Omi?s warnings of high risk of carry trades right now that prompted massive sell-offs. This weakened the high-yielding currencies, such as GBP, USD, NZD and AUD and strengthened the yen. It reached as low as 122.40 today, and analysts predict it can head even lower.

The strong retail sales figures helped boost the shares of department store operators, such as Daimaru Inc. and Isetan Co. However, their gains had negligible effects on the index that had a steep 216.8 points decline. As the analysts remained skeptical about the health of the industrial output, large manufacturers and exporters were leading the fall. Top three were Fanuc Inc, a manufacturer of factory automation systems, down 2.2%, Canon, producer of imaging solutions with strong presence in the US, down 2.4% and Kyocera, manufacturer of electronic equipment, down 1.6%. The index closed at 17849.3, crossing the psychological 18000 level.

As expected, bonds have gained and yields took a significant dip due to massive carry traders? pullbacks and weak equities across the globe, led by modest dip of the Dow that lost 14.4 points, much amplified by Nikkei that saw a drop of 216.8 points. The yields fell 1.4 basis points to 1.875.