Yen at a Crossroad

The yen has been pulled up and down today on mixed sentiment, as the Corporate Prices were hot, but carry traders were intervening and analysts proclaimed that the Japanese currency will continue losing against the US dollar. The capital markets were driven by news from the US, where the focus remains on the sub prime market and the problems of the Bear Stearns funds.

[B]Japan Corporate-Service Inflation Highest in 9 Years[/B] - Bank of Japan printed the corporate service price index that climbed 1.4%, highest since December 1997. The costs of services, such as transportation and rent, are expected to induce companies to raise prices, driving up the inflation. The BOE?s governor Fukui stated on May 17 that it is possible that the central bank will raise rates even if the consumer prices are falling, as long as the policy makers will be confident about the inflationary pressures. [I]Source: Bloomberg[/I]
[B]Cover Story: Japan next[/B] - The Japanese carmakers are about to enter into a second car war, this time with their Korean neighbors. Hyundai Motor Co. launched in 1967 has established a global presence by now, having sold 3.76 million vehicles in 2006 targeting 6 million vehicles to be sold in 2010. Hyundai did better than two leading Japanese carmakers: Nissan (3.47 million vehicles worldwide) and Honda (3.55 million vehicles). It is outperforming its Japanese rivals in developing countries, such as India and China, and gets a tighter grip on the US market as well. However, Hyundai?s sales in Japan are weak at mere 1,651 vehicles sold in 2006. The company is changing its strategy and will introduce a minivan i30 this fall, responding to customer preferences. The two Asian countries have become closer partners after co-hosting the world soccer cup in 2002 that resulted in a “Korean boom” in Japan. Hyundai hopes that its cars will be able to get accepted on the Japanese streets. Source: Asahi Shimbun

[B]Insurers to cut contract options / Supplementary policies targeted after failure to pay out in many cases[/B] - Japan has deregulated nonlife insurance in 1998, which prompted insurance companies to increase the number of supplementary contracts to make up for the declining revenues from the premium payments. However, the contracts have become too complex making it difficult for policyholders to keep track of their benefits. Furthermore, the insurers have failed to pay out on multiple occasions. As a result, the number of supplementary contracts will be contracted. Major Japanese insurers will cut their supplementary options by 22-50%. Source: Yomuri Shimbun

Japanese currency firmed today as prices pressures at the corporate level showed a significant increase. The May Corporate Service Prices have printed 1.4% against 1.1% prior, generating the highest reading since 1997. On top of that, a Finance Ministry official stated that Hiroshi Watanabe will step down as Japan?s currency official. Watanabe never intervened in the currency market, unlike his predecessors, and was regarded as a yen dove. His departure will serve as a buying signal for the Japanese currency. Meanwhile, the carry traders are continuing to take advantage of the Japanese lending rate of 0.5%, lowest among major economies. As investors and analysts expect the BOE to raise rates only once this year, they envision yen falling additional 2% against the dollar by September. In the past 24 hours, yen has been pulled up and down on these mixed sentiments trading in the range of 123.25-123.93.

Troubling news from the US, where the subprime mortgages are pulling Dow down has raised fears that the consumer spending in the world?s largest economy will stagnate, hurting Japanese exporters. As a result, large exporters such as Nissan Motor Co. and Komatsu Ltd. have led the morning drop. By market?s close, the index movers were two Advantest Corp. that produces electronic testing equipment, down 2.0%, a chipset giant Trend Micro, down 4.7% and Softbank Corp. that provides fixed line telecommunication services, down 2.1%. Nikkei ended up at 18066.1, down 21.4 points on the day.

News reports blame the weakness in US housing for driving up the Japanese bonds for a third day in a row. The weak US home sales report that printed yesterday was named the main trigger for the 10-yr yield to drop.