Monday, 15 May 2006

BoJ may takes its time, PBC makes a move

Suddenly, an interest rate hike in Japan looks slightly less imminent. From Reuters:

Japanese machinery orders fell surprisingly sharply in March, government data showed on Monday, dampening speculation that the Bank of Japan might end its zero-interest-rate policy imminently.

BOJ Governor Toshihiko Fukui himself played down speculation of an imminent policy tightening, saying the central bank would not necessarily raise rates immediately when it finishes mopping up excess funds in the banking system.

While Fukui said the BOJ could take its time in raising interest rates if the economy moved in line with its scenario for sustained but slower growth, he also pointed out the risks were more to the upside than to the downside...

Core private-sector machinery orders, a key but volatile gauge of capital spending, fell a seasonally adjusted 5.2 percent in March from the previous month, compared with a consensus market forecast for a 0.5 percent increase, Cabinet Office data showed.

The Nikkei share price average dropped on the machinery orders numbers, compounding a loss of some 5 percent over the past week, but it rebounded after Fukui's remarks. The Nikkei ended at 16,486.91, down 0.69 percent on the day but more than 1 percent above the day's low.

The Nikkei also probably fell because of inflation fears.

[T]he BOJ's own data showed Japanese wholesale prices rose more than expected in April due to higher prices of commodities, which was slowly filtering through the economy. The corporate goods price index (CGPI) for April was up 2.5 percent from a year earlier, above a consensus market forecast of a 2.3 percent rise.

And investors must also be fearful that the recently-rising yen may curb its exports, which has been strong so far. From AFX/Forbes:

The current account surplus in March surged 32.8 pct from a year earlier, rising for the second straight month, despite the trade surplus shrinking due to costlier oil, the Ministry of Finance said.

The current account was in surplus by 2.39 trln yen, against the year-earlier's 1.80 trln...

But the trade surplus dropped 6.0 pct to 1.11 trln yen as imports rose faster than exports due to higher crude oil prices.

Exports increased 18.2 pct to 6.51 trln yen, up for the 28th straight month, while imports jumped 24.8 pct to 5.40 trln, the 25th consecutive monthly increase...

The income account posted a surplus of 1.61 trln yen, an all-time high, up from 1.03 trln a year earlier, because of sharp increases in portfolio income and dividend income.

Concerns arising from an appreciation of the yen and other Asian currencies must have been boosted by developments in China today. From Bloomberg:

The yuan strengthened beyond 8 to the dollar for the first time in more than 12 years, prompting speculation China's government is allowing faster gains to win U.S. support for its currency policy...

The central bank today set its reference rate for yuan trading at 7.9982 against the dollar, stronger than 8 for the first time since the revaluation...

A report today also showed China's money supply expansion unexpectedly picked up in April and bank lending more than doubled. The central bank may need to reduce yuan liquidity in the market, said Qing Wang, a currency strategist with Bank of America in Hong Kong.

M2, which includes cash and all deposits, rose 18.9 percent from a year earlier after gaining 18.8 percent in March, the People's Bank of China said on its Web site. Growth was expected to slow to 18.5 percent, according to the median estimate of 23 economists surveyed by Bloomberg News.

Whatever the reason for the Chinese currency's dip below 8, it did not last very long.

The yuan closed at 8.003 at 5:30 p.m., according to the Web site of the China Foreign Exchange Trade System in Shanghai.

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