By David Turner in Tokyo-FT.com
Published: March 20 2007 03:15 Last updated: March 20 2007 08:41
The Japanese stock market extended gains into Tuesday, bolstered by continuing yen weakness and a jump in large property stocks.
The Nikkei 225 closed up 0.9 per cent at 17,163.20. The broader Topix rose 0.8 per cent to 1,708.29.
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By late afternoon the yen was trading at Y117.7 to the dollar, helping to push up export focused-sectors. The auto sector climbed 1 per cent. Toyota Motor, Japan’s biggest carmaker, was 0.9 per cent higher at Y7,740. Nissan Motor was 1.1 per cent higher at Y1,319, with Honda Motor up 0.7 per cent to Y4,160.
Mitsui Fudosan, Japan’s biggest property company, jumped 4 per cent to Y3,360 after Goldman Sachs raised its target share price to Y4,150 from Y3,659, citing higher land prices in southern Tokyo. Its two biggest rivals also gained from the general positive sentiment. Mitsubishi Estate advanced 3.6 per cent to Y3,780. Sumitomo Realty & Development was up 2.2 per cent to Y4,590.
Makers of construction materials rose. Sumitomo Osaka Cement leapt 4.9 per cent to Y408, with rival Taiheiyo Cement up 4.7 per cent to Y517, after Credit Suisse began coverage with “outperform” ratings, citing growing private demand.
Sanyo Electric, the troubled electronics manufacturer, had a volatile day, falling in morning trading before recovering to end 1.1 per cent higher at Y186 after the resignation of its chairwoman, Tomoyo Nonaka. Sanyo is set to report a third consecutive annual loss for the year to March, and is being investigated by the authorities for for possible accounting problems
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Yen Volatility Rises as Investors Unwind Carry Trade
March 29 (Bloomberg) -- Volatility climbed on yen options as investors exited bets on riskier assets financed by borrowing in Japan's currency.
The yen reached a nine-day high against the dollar as a slowing U.S. economy and tension between Iran and the U.K. led investors to pare back on so-called carry-trade bets. Japan's currency touched a three-month high in early March as investors trimmed carry-trade wagers amid a slide in global stocks.
``The market is concerned about funding carry-trade positions with yen,'' said Paul Mackel, a senior currency strategist at HSBC Holdings Plc in London. ``There is concern about the outlook for the U.S. economy; geopolitical risk is helping bring a bid to volatility.''
Japan's currency traded at 116.99 against the dollar at 10:45 a.m. in Tokyo from 116.86 late in New York yesterday, when it reached 116.39, the strongest since March 19. Crude oil rose to a six-month high in New York as U.K. Prime Minister Tony Blair pressured Iran to release 15 U.K. sailors and Marines.
Implied volatility on one-week dollar-yen options rose 2.15 percentage points to 10.9 percent on March 28 in New York, the biggest jump in two weeks, as traders bought options to protect bets the yen would fall. Implied volatility, a gauge of traders' expectation for prices swings, increases as demand for options rises. One-month implied volatility rose about one percentage point to 9.2 percent, the biggest jump since March 16.
`Re-pricing of Risk'
Investors have been borrowing in Japan, where the benchmark overnight rate is 0.5 percent, to invest in countries where rates are higher. The U.S.'s key rate is 5.25 percent, and the 13-nation euro region's target is 3.75 percent. Investors also finance carry trades in Switzerland, where the benchmark rate is 2.25 percent.
``The market is due for a re-pricing of risk, which for the foreign exchange market will result in a stronger yen and a stronger Swiss franc,'' said Phyllis Papadavid, a currency strategist at Lehman Brothers Holdings Inc. in London. Lehman forecasts a yen rally to 112 per dollar at year-end.
The yen reached its strongest level of the day on March 28 after a government report showed orders for U.S. durable goods excluding transportation equipment fell 0.1 percent last month after a 4 percent drop in January.
Evidence of a slower U.S. economy may bolster speculation the Federal Reserve will cut interest rates this year and trigger further unraveling of carry-trade investments.
Premium on Calls
Demand for yen calls, which grant investors the right to buy the currency, is climbing relative to puts, which give the right to sell.
The so-called risk-reversal rate for one-month dollar-yen options touched minus 1.8 percent on March 28, the widest premium for yen calls since March 19. A negative risk-reversal indicates greater demand for yen calls relative to yen puts. On March 5, the risk-reversal rate reached minus 2.15 percent, the largest premium on yen calls since at least January 2005, when Bloomberg began compiling data.
Volatility on yen options will keep climbing, according to Mackel. There is a risk of greater swings in the currency before officials of the Group of Seven nations gather next month and in advance of the Bank of Japan's rate-setting meeting on April 10, he said.
Implied volatility on one-month dollar-yen options may climb to 10 percent before the meetings, Mackel said.
Finance ministers and central bankers from the seven major industrialized nations meet in Washington on April 13 and 14. The group comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada.
The yen got a boost before February's G-7 gathering on speculation European officials would say Japan's currency is too weak.
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