Yen Declined as Carry Trade Continues

Japanese stock markets declined today as bond yields rose and Prime Minister Abe cleared in his speech that he was not against raising taxes. Yen fell against most of its counterparts due to hawkish speech from European Central Bank minister and favorable Job creation data issued by the US government.



[/U]Tokyo Mom and Pop Traders Pass Chicago in Yen Sales:
[/B]Yen sales by Japanese mom and pop investors this week exceeded professional traders’ bets against the currency on the Chicago Mercantile Exchange. Net short positions on the yen against the dollar, or wagers Japan’s currency will fall, reached $1.1 billion among traders using borrowed funds on July 4, according to Tokyo Financial Exchange. Based on estimates of the exchange’s market share, the total position of Japanese individual investors is about $19.15 billion, compared with a record $19.07 billion of bets by traders on Chicago’s market.
Japan’s Economy to Keep Growing, BOJ’s Fukui Says:
Japan’s economic expansion will probably be sustained and the central bank will adjust interest rates by carefully studying the economy and prices, Governor Toshihiko Fukui said. Two central bank policy makers this week said Japan’s borrowing costs, the lowest among major economies, need to rise to reflect the economy’s strength. Deputy Governor Toshiro Muto and board member Kiyohiko Nishimura said keeping rates unchanged for too long could hurt growth in the long run. Economists and investors expect the bank to raise the key rate in August.

Abe Is Open to Raising Sales Tax, Ministers Says:
Japanese Prime Minister Shinzo Abe is open to the possibility of raising the nation’s sales tax, government ministers said today. Japan’s 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 has vowed to balance the budget by 2011.
The Yen fell to a record low against the Euro as European Central Bank President Jean-Claude Trichet said yesterday that he has no intentions to change market expectations of a rate hike in September. Japanese retail investors continue to look for a chance to invest in high yielding countries. Yen fell against the dollar too, breaching the 123 figure and closing at 123.33 for the day. Volatility implied by dollar-yen options that expire in one-month stood at 6.70 percent, down from 6.70 encouraging carry trades as it exposes these debts to less currency risk. According to data complied by Bloomberg, Japanese fund managers are expected launch more than 1.4 trillion yen of foreign currency trusts before the end of this month. A rise in the USDJPY pair was further supported by increase in the 10-year US treasury yield to 5.13 percent as of 3:00am New York time.

Japanese stock market dropped today ending a six day rally as bond yields rose raising borrowing costs for companies. Property developers and electric power companies were the leaders. Mitsubishi Estate Co. lost 1.8 percent, while Tokyo electric Power fell the most in four weeks. Mitsubishi corp. led gains by trading companies after the price of oil climbed above $72 a barrel for the first since August 2006. Stocks were further pushed down later in the day after Prime Minister Shinzo Abe denied that he was against the opinion of raising consumption tax. The Nikkei rested at 18,140.94, down 80.54 points. Nikkei futures expiring in September dropped 0.6 percent to 18,130 in Osaka.

Japan?s 10-year bonds declined for the third day as a report showed that US Job creation was faster than expected and growth service industries accelerated. The yields climbed 2 basis points resting at 1.940 for the day. Ten year bond futures for September delivery dropped 0.24 to 131.36.