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Global Stocks Slip on Signs of Economic Stress in China and Japan

May 23, 2013 by Leave a Comment

HONG KONG — A 7 percent stock market sell-off in Tokyo led to moderate declines in equity markets across Europe and Asia on Thursday, and Wall Street opened weakly, amid concerns about global growth and uneasiness about central bank actions.

Shares came under pressure in Asian trading after news that the manufacturing sector in China, one of the main engines of global growth in recent years, was faltering. That, along with concerns about daring shock therapy Japan is employing to restart its economy after two decades of stagnation, further combined with leftover confusion in financial markets about the U.S. Federal Reserve’s intentions following testimony Wednesday by its chairman, helped to further rattle investors.

The result was a 7.3 percent rout in the Japanese market benchmark, the Nikkei 225-stock average, and other Asian markets followed. The Hang Seng Index in Hong Kong sagged 2.5 percent, and the Sydney benchmark index fell almost 2 percent.

In European afternoon trading, the Euro Stoxx 50 index of euro zone blue chips fell 2.5 percent, while the FTSE 100 in London was down 2 percent. On Wall Street, the Standard Poor’s 500-stock index was down more than 1 percent in morning trading, while the Dow Jones industrial average lost 0.6 percent. The Nasdaq was off 0.8 percent.

The euro ticked up 0.2 percent against the dollar, to $1.2887. The dollar fell 1.4 percent against the Japanese currency, to 101.74 yen.

China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more gradual but more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after that of the United States – remain liable to unsettle markets not just in Asia but around the globe.

High hopes that the bold economic policies of Prime Minister Shinzo Abe of Japan will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year.

Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.

“The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.”

The sell-off Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 from 46.7, while the services index rose to 47.5 from 47.0. While a number below 50 indicates continued contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half.

In Hong Kong, Stephen Corry, chief investment strategist at LGT, agreed that a combination of negative news helped spur the sell-off, including the disappointing data from China and signs that the Fed may begin to scale back its stimulus efforts. But the Japanese market had rallied more than 14 percent this month alone, he added, and “was probably due a breather.”

Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.

One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the past few weeks have shown that the economy has begun to pick up speed.

Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained,” Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”

Mr. Yoshimoto of the Japan Research Institute also said the sharp market moves Thursday had not changed the overall longer-term picture for recovery in Japan. That could change if Mr. Abe fails to follow through on his promises of economic reforms, he said, “but for now, there’s no need to become overly pessimistic about Japanese shares.”

David Jolly reported from Paris.  Hiroko Tabuchi contributed reporting from Tokyo.

Article source: http://www.nytimes.com/2013/05/24/business/global/china-economy.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Japan’s Moves to Weaken the Yen Have a Global Effect

April 9, 2013 by Leave a Comment

The most visible sign of the move by the bank, which is the country’s central bank, was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225-stock average. The dollar settled at 99.32 yen on Monday in New York, a four-year high. The euro traded at 129 yen, its highest level in more than three years.

“They’re taking a page out of the quantitative easing playbook, multiplied two and a half times what the Fed is doing,” said Michael H. Strauss, chief investment strategist at Commonfund in Wilton, Conn.

That, he said, created a situation where institutions and individuals both faced pressure to buy stocks, at home and overseas.

The shake-up was touched off on Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies. He said the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as it tries to raise the annual inflation rate to its new 2 percent target.

Mr. Kuroda’s plan calls for the central bank to inject nearly 62 trillion yen, or $630 billion, into the economy this year, new money that must find a home. Some of that will undoubtedly end up overseas.

“This is a very big new injection of money into the global system,” said Thomas Mayer, senior adviser to Deutsche Bank in Frankfurt, and overseas bonds and equities will be among the beneficiaries.

United States stocks and bonds, which are already trading at high levels, are one obvious target for investors with yen to spend, he said. Core European countries like Germany, France and Britain are also favored destinations for Japanese capital, as are Australia and New Zealand.

The debt of governments in the developed world is already trading at low yields, Mr. Mayer noted, but as long as the euro zone crisis continues, struggling southern euro countries like Spain, Italy and Portugal may attract rather less investor interest because of concern about political risk.

While the size of the Japanese intervention is perhaps unprecedented relative to the size of the country’s economy, the Bank of Japan is in good company. The Federal Reserve, the Bank of England and the European Central Bank have all poured in liquidity and worked to hold interest rates down as the global financial sector creaks along year after year. That money is credited with helping to keep government borrowing costs low and to push the Dow Jones industrial average to high levels this month.

A weakening Japanese currency opens a window for international investors to profit on two fronts. With the central bank’s main interest rate target near zero, they can borrow the yen cheaply, then lend it abroad.

This “carry trade” offers the possibility of higher returns overseas — and if the yen falls, investors also reap a foreign-exchange gain since they can repay the loan in cheaper yen.

Of course, a rising yen would bring the opposite result, but the magnitude of the central bank’s plan could persuade investors that the currency is set to fall further.

Julian Jessop, chief global economist at Capital Economics in London, estimated that the dollar would continue strengthening to 110 yen this year and to 120 yen next year.

“The Bank of Japan’s new policy stance surely does amount to a game changer,” he noted, “at least for the currency markets.”

The weakening yen may also be felt by companies operating outside Japan — like American and German automakers and South Korean device manufacturers, which compete head-to-head with Japanese corporations. Those companies may find themselves under pressure to squeeze profit margins to compete against suddenly flush Japanese competitors.

“Some of these Japanese companies were profitable at 78 yen to the dollar,” Mr. Strauss said, so the dollar at 100 yen would be a boon for the corporate sector.

It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned that there were larger concerns to consider: “By injecting such a large amount of money into the global financial system, you may end up distorting prices in such a way that it causes distortions in the real economy.”

Mr. Strauss said the biggest effect would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than 0.4 percent or could take on a little more risk in stocks.

The lesson after the Japanese investment bubble collapsed in 1990 was “never own equities again,” he said, but the moment may have arrived where that no longer holds true.

But today’s Japanese investors are more cautious than those of a generation ago, he added.

“I don’t think they’re going to go out and buy Pebble Beach,” he said, referring to the golf course in California that was acquired by a Japanese business owner in 1990 at a wildly inflated price.

Article source: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Japan’s Policy to Weaken Yen Has a Global Effect

April 8, 2013 by Leave a Comment

PARIS — The Bank of Japan’s extraordinary new anti-deflation policy was making waves throughout the global financial system Monday, driving down the yen and lifting share prices in Tokyo, but economists said the effect has yet to be fully felt overseas.

The most visible sign of the central bank’s move was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225 stock average. The dollar was trading at ¥98.905 on Monday afternoon in New York, a four-year high. The euro traded at ¥128.75, its highest level in more than three years.

“They’re taking a page out of the quantitative easing playbook, multiplied two and a half times what the Fed is doing,” said Michael Strauss, chief investment strategist at Commonfund in Wilton, Connecticut.

That, he said, creates a situation where both institutions and individuals are facing pressure to buy equities, at home and overseas.

The shake-up was touched off Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies, saying the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as the institution tries to raise the annual inflation rate to its new 2 percent target.

Mr. Kuroda’s plan calls for the central bank to inject nearly ¥62 trillion, or $630 billion, into the economy this year, new money that must find a home. Some of that will undoubtedly end up overseas.

“This is a very big new injection of money into the global system,” said Thomas Mayer, senior adviser to Deutsche Bank in Frankfurt, and overseas bonds and equities will be among the beneficiaries.

U.S. bonds and stocks, which are already trading near record levels, are one obvious target for investors with yen to spend, he said. Core European countries like Germany, France and Britain are also favored destinations for Japanese capital, as are Australia and New Zealand.

Debt of governments in the developed world is already trading at very low yields, Mr. Mayer noted, but as long as the euro zone crisis continues, struggling southern euro countries like Spain, Italy and Portugal may attract rather less investor interest because of concern about political risk.

While the size of the Japanese intervention is perhaps unprecedented relative to the size of the country’s economy, the Bank of Japan is not alone. The Federal Reserve, the Bank of England and the European Central Bank have all poured in liquidity and worked to hold interest rates down as the global financial sector creaks along year after year. That money is credited with helping to keep government borrowing costs low and to push the Dow Jones industrial average to a record high this month.

A weakening Japanese currency opens a window for international investors to profit on two fronts. With the central bank’s main interest rate target near zero, they can borrow the Japanese currency cheaply, then lend it abroad.

This “carry trade” offers the possibility of higher returns overseas — and if the yen falls, investors also reap a foreign-exchange gain since they can repay the loan in cheaper yen.

Of course, a rising yen would bring the opposite result, but the magnitude of the central bank’s plan could convince investors that the currency is set to fall further.

Julian Jessop, chief global economist at Capital Economics in London, estimated that the dollar would continue strengthening to ¥110 this year and to ¥120 next year.

“The Bank of Japan’s new policy stance surely does amount to a game-changer,” he noted, “at least for the currency markets.”

The weakening yen may also be felt by companies operating outside Japan — like American and German automakers and South Korean gadget manufacturers, which compete head-to-head with Japanese corporations. Those companies may find themselves under pressure to squeeze profit margins to compete against suddenly flush Japanese competitors.

“Some of these Japanese companies were profitable at ¥78 to the dollar,” Mr. Strauss said, so the dollar at ¥100, or “parity,” will be a boon for the corporate sector.

“This will provide a reliquidification of the Japanese market,” he said.

It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned there were larger concerns to consider: “By injecting such a large amount of money into the global financial system, you may end up distorting prices in such a way that it causes distortions in the real economy.”

Mr. Strauss said the biggest impact would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than four-tenths of a percent, or could take on a little more risk in stocks.

The lesson after the Japanese investment bubble collapsed in 1990 was “never own equities again,” he said, but the moment may have arrived where that no longer holds true — with a payoff for the country and markets overseas.

But Japanese investors are more cautious than those of a generation ago, he added.

“I don’t think they’re going to go out and buy Pebble Beach,” Mr. Strauss said, referring to the legendary golf course in California acquired by a Japanese business owner in 1990 at a wildly inflated price.

Article source: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Japan’s Nikkei Average Surges

February 6, 2013 by Leave a Comment

TOKYO — Japan’s Nikkei average surged 3.8 percent Wednesday, closing at its highest point since October 2008, after the yen fell sharply amid expectations of a more aggressive economic policy.

The benchmark rose 416.83 points to 11,463.75, its biggest one-day gain since March 2011, as the Japanese currency dropped to 94.08 against the dollar.

On Tuesday, Masaaki Shirakawa, the governor of the Bank of Japan, said he would step down, along with his two deputies, in March, three weeks before the scheduled end of his five-year term.

Prime Minister Shinzo Abe has put the central bank under relentless pressure to do more to pull the economy out of the doldrums. Mr. Shirakawa’s announcement opened the way for him to quickly appoint a governor who would be bolder in loosening monetary policy.

“There was a very aggressive, solid weakening of the yen in response to what seems like relatively trivial news,” said Stefan Worrall, director of equity sales at Credit Suisse in Tokyo. “But it’s nonetheless news that signals the expectation and recognition that the momentum in Japan is continuing to favor yen weakening,”

Although investors have seen the weak yen as a boon for exporters over the last two and a half months, Mr. Worrall said, there are other benefits to a more competitive exchange rate.

“On a U.S. dollar basis, Japan has yet to break out, particularly if you compare its rally with rallies” in Germany and Australia, he said.

Indeed, brighter profit forecasts from the likes of Toyota Motor and Mitsubishi Heavy Industries helped sustain the optimistic mood Wednesday. Their gains stemmed from the weaker yen, which inflates the value of earnings from overseas.

Toyota climbed 6.1 percent and was the most-traded stock by turnover on the main board, and Mitsubishi Heavy rose 10.4 percent, with both stocks hitting their highest levels since autumn 2008.

Expectations of a new central bank governor also helped inflation-sensitive shares, as the central bank signed onto a new 2 percent inflation target last month with the government. On Wednesday, the real estate sector advanced 4 percent.

Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley, said the central bank might start “open-ended” asset buying in April, well before the 2014 start the central bank committed to at its last policy meeting.

Mr. Fujito said he saw Kazumasa Iwata, a former Bank of Japan deputy governor and a vocal supporter of an asset purchase fund of ¥50 trillion, or $530 billion, as the most likely candidate to succeed Mr. Shirakawa.

Others seen as possible candidates are Haruhiko Kuroda, president of the Asian Development Bank, and Heizo Takenaka, who a decade ago was an economics minister.

Article source: http://www.nytimes.com/2013/02/07/business/global/japans-nikkei-average-surges.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,