Tokyo market: Investors wait for Americans to speak

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JAPAN'S BENCHMARK stock index may trade around Y17,500 this week, ahead of the outcome of a meeting of the interest rate setting committee of the US Federal Reserve. Investors may avoid exporters, which rely on the US for revenue, should the Fed increase rates and indicate that it may continue to do so until the US economy slows down.

"Everyone expects a 0.25 per cent hike in interest rates," said Keith Edwards, a strategist at American Express Asset Management. "But if they were to talk about the rate rise as the beginning of a trend, then markets would react more negatively."

The Nikkei 225 average fell 1.7 per cent last week - its first weekly decline in three weeks - to close at 17,436.52. The exporter-led, 1 per cent decline on Friday accounted for most of the fall.

Bonds are likely to fall as investors brace themselves for a possible weak demand for bond sales this week. Signs of economic recovery will raise the chance that the central bank will cut short its low-rate policy. "More slippage is likely as investors remain concerned over auction results," said Xinyi Lu, chief strategist at Paribas Capital Markets. "People are concerned about how long the central bank will keep rates low."

The new benchmark 10-year bond fell, pushing the yield up 3 basis points to 1.77 per cent. The appetite for equities and bonds is not expected to be strong before the 5 July release of the Bank of Japan's quarterly tankan survey of business confidence.

The surprise 1.9 per cent growth in first-quarter gross domestic product is expected to increase business confidence. That could lead to the buying of companies that depend for profit growth on the well-being of the domestic economy.

"The tankan has been distorted by the GDP numbers, and the markets are getting braced for better than expected figures," said Marshall Gittler, currency strategist for Bank of America, Hong Kong. "If you are a small company things do look better for you."

Investors will focus on industrial production figures and household spending for May, which the government releases on Tuesday. Economists forecast an average 0.7 per cent rise in industrial production from the month before, and a 0.6 per cent rise in household spending month on month.

The market is unlikely to rise above 17,900 this week as institutional investors take profit on their cross-shareholdings, or long-held shares of companies with whom they have close ties.