Merchant Sentiment
Sentiment among Japanese merchants fell in August to its lowest level in seven years as higher food and oil prices crimped spending by households. The Economy Watchers index, a survey of barbers, taxi drivers and other who provide services directly to consumers, dropped to 28.3, the lowest since October 2001, from 29.3 in July, according to data out from the Japanese Cabinet Office today.
On the other hand merchants do expect business prospects to improve as energy costs ease. The index sub component which refers to conditions in two to three months time was up to 32 from 30.8, the first increase since February. Japan's gasoline prices have now dropped 4.8 percent since reaching a record 185.1 yen a liter ($6.45 a gallon) in the first week of August. Crude oil has fallen 26 percent since July 11.
Stocks Up
Japan's stocks in contrast jumped today, and by the most in five months, led by banks, following yesterday's announcement that the U.S. government was going to take control of mortgage lenders Fannie Mae and Freddie Mac. Basically this news is a Japan positive if it means consumption in the US will recover more quickly than it otherwise would have done, and this weekends intervention probably means that the US housing market will now recover sooner rather than later.
The Nikkei 225 Stock Average climbed 412.23, or 3.4 percent, to close at 12,624.46 in Tokyo. The broader Topix index added 45.57, or 3.9 percent, to 1,216.41. Both indexes gained the most since April 2, and all but three of 33 Topix industry groups rose.
Mitsubishi UFJ was up 13 percent to 850 yen, while Mizuho, the Japanese bank with the highest losses related to the U.S. mortgage market, climbed 12 percent to 463,000 yen. Both jumped by their daily trading limits. Sumitomo Mitsui Financial Group Inc., Japan's No. 3 bank, added 15 percent to 674,000 yen. The Topix Banks Index rose 12 percent, the most since April 1992. Japan's three biggest banks held a total of 4.7 trillion yen ($43 billion) in debt securities issued by U.S. government- related mortgage financers including Fannie Mae and Freddie Mac as of March 31.
Yen Falls
Conversely the yen fell by the most in three months against the euro and was also down versus the dollar as the Fannie Mae and Freddie Mac takeover seems to boost investor appetite for higher-yielding assets. The yen dropped by the most in six months against the Australian and New Zealand dollars, two of favourites for the so-called carry trade.
The yen fell as much as 2.2 percent to 157 per euro, before trading at 154.18 at 10:14 a.m. in London, from 153.67 in New York on Sept. 5. It declined to 108.57 versus the dollar from 107.73. The euro was at $1.4214, from $1.4267. The pound advanced to $1.7694 from $1.7661. Against the Australian dollar, the yen fell 1.6 percent to 89.34, from 87.91 in New York on Sept. 5. It declined 3.5 percent to 74.38 per New Zealand dollar.
These days it is quite normal for Japan's currency to rise when demand for higher- yielding assets falls, as was happening last week, and to rise when demand for these same assets bounces back again , since carry trades swing first one way and then the other as the so called "punters" try to guess what is about to happen next.
Generally in these trades, investors obrain funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 2 percent in the U.S., 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to carry trades is that currency moves erase profits.
As can be seen, most of this has little to do with Japan's underlying situation, except perhaps insofar as the fact Japan is probably entering what might be a protracted recession means that the next move for Japanese interest rates is much more likely to be down than up, while if the Paulson "put" works, then the next move for US rates may well be up and not down. Essentially "carry" is like a large casino where the way to make money revolves around trying to "best guess" such eventualities.
Lending Growth Stagnates
Meantime, in terms of realities back on the home turf, lending growth at Japanese banks failed to accelerate for a second month in August as the economy moved closer to a recession and bankruptcies among real-estate companies surged. Loans excluding those by credit associations rose 2 percent year on year in August after expanding at the same pace in July, according to Bank of Japan data out today.
Capital spending fell, eroding demand for loans, as Japan's economy contracted - according to preliminary estimate which will almost certainly be revised for the worse - at an annualized 2.4 percent in the three months ended June 30, bringing the country to the threshold of its first recession in six years. Capital spending at Japanese businesses excluding software companies declined 7.6 percent in the three months ended June 30, making for a fifth straight quarterly decline.
The number of Japanese real estate companies filing for bankruptcy protection surged 23.5 percent in August from a year, while the number of property developers filing for bankruptcy protection reached 42 last month, according to Tokyo Shoko Research, a credit research firm, in a research report. The total number of bankruptcies rose to the highest for the month of August since 2003, gaining 4.2 percent from a year earlier. Liabilities at failed real estate companies more than doubled from July to 438.97 billion yen ($4 billion), although they fell 24.9 percent from a year earlier because of the bankruptcy a year ago of unlisted Azabu Tatemono KK with 564.8 billion yen of debt. Accumulated debt by failed real estate companies accounted for half the total liabilities among all Japanese companies that were declared bankrupt in August.
