Nikkei reaches to a 7-Year High as Yen Continued to Decline

Nikkei touched seven-year high as Machine Orders increased but yen declined further as EURJPY hit record highs on carry trade demand. Bond yields rose negatively affecting the stock prices of property developers.


Japan’s Machine Orders Rise, Supporting Rate Increase:
Japan’s machinery orders, a key indicator of corporate spending plans, rose at triple the pace economists predicted, reinforcing expectations the central bank will raise interest rates as soon as next month. Orders climbed a seasonally adjusted 5.9 percent in May from the previous month, the Cabinet Office said in Tokyo today, a second monthly gain. The median estimate of 32 economists surveyed by Bloomberg News was for 1.9 percent. Manufacturing equipment orders rose at the fastest pace in almost a year, signaling industrial production is likely to recover. Two Bank of Japan policy makers last week said keeping borrowing costs, the lowest among major economies, unchanged for too long could hurt economic growth in the long run.
Japan’s Merchant Confidence Falls to Two-Year Low:
Sentiment among Japan’s barbers, shopkeepers and other merchants on the front lines of the economy dropped to the lowest level in two years, signaling sliding wages and higher taxes may discourage consumers from spending. The Economy Watchers index, which gauges the strength of domestic demand via a survey of about 2,000 people who deal directly with consumers, fell to 46 points in June, a third monthly decline, the Cabinet Office said today in Tokyo. A number less than 50 means pessimists outnumber optimists. Slumping wages, higher taxes and concern over lost pension benefits may hobble consumers, whose spending makes up more than half of the economy. Japan’s longest postwar expansion has been driven by business investment and exports of cars and electronics.
Abe Says Sales Tax Increase May Hurt Economic Growth:
Prime Minister Shinzo Abe said an increase in the national sales tax could harm Japan’s economy as it did in the 1990s, when it stalled a recovery from a decade- long slump. The government faced with a public debt the size of Asia- Pacific’s next 13 largest economies combined, needs to find a way to pay for its social security system as the population ages. Abe, who on July 5 said he hadn’t ruled out raising the 5 percent sales tax, has vowed to balance the budget by 2011.
The Yen continue to slide against the dollar and marked another record low against the Euro today. One of the major causes was the rally in the Asian stocks which gave investors more confidence to invest in high yielding securities from the money borrowed in Japan. The currency also slid to a 16-year low against the Australian dollar. The yield spread between two-year Japanese and US debt widened to 3.9138 percentage points. Stronger than expected machinery orders data slightly helped the falling currency but a decline in the Japan?s Merchant Confidence further paced the downfall. The Economy Watchers index fell to 46 points in June. Higher taxes and concern over lost pension benefits hurt consumer confidence. Japan?s longest post war expansion has been driven by business investment and exports of cars and electronics only. Prospects for consumers spending may deteriorate further according to the outlook index which fell to 48.4. However; rising demand of labor has been increasing optimism of economy?s growth in the minds of many. Credit Suisse raised its Japan growth estimate to 2.9 percent from 2.5 percent. As of 3:30 am New York time USDJPY was trading at 123.50

Despite the rise in bond yields, Japanese stocks advanced today as investors increased their expectation of companies profit after a report showed that machine orders unexpectedly increased. Nikkei 225 rose to seven-year high closing at 18261.98. Energy related stocks including Nippon Mining Holdings Inc. and Marubeni corp. also jumped after crude oil breached the 72 dollar figure. Some exporters such as Nikon Corp. and Toyota Motor Corp. advanced on speculation that weak yen will inflate the value of the overseas sales. On the other hand, property stocks continue to fall as bon yields rise. Nikkei futures expiring in September advanced 0.7 percent to 18270 in Osaka.

Japan?s 10-year bonds declined for the fourth day as a report showed that machine orders increased more than expectation. The yields climbed .2 basis points resting at 1.960 for the day. Ten year bond futures for September delivery dropped 0.14 to 131.31.