Tokyo Market: Rising yen may eat into export earnings

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JAPAN'S stock index may fall this week, led by exporters concerned that a rising yen will eat into their overseas earnings. They are also worried that a possible rise in US interest rates will cut consumer spending in the world's largest economy. It is thought bonds will rise as falling stocks boost the appeal of fixed-income securities. The central bank is likely to keep interest rates low to boost the economy.

Exporters such as Sony and Fujitsu may be losers after falling last week from recent highs. Electronics makers were part of a rally that pushed up the Nikkei last week to its highest closing level since September 1997.

"The market has come a long way and we're due for a bit of a slip-up," said Jonathan Allum, strategist at ING Baring Securities. "Electricals and exporters underperform when the yen is strong."

Last week, the benchmark Nikkei 225 average fell 4 per cent to 17,534.44, the first weekly decline in seven weeks and nearly 1,000 points below its high on Monday. It had its biggest tumble in four months after the Bank of Japan failed to keep the yen weak by buying US dollars.

Market watchers are calling for the yen to continue rising as foreign investors buy yen to purchase Japanese stocks. "The sheer volume of buying by foreign investors in the equity market means there's a bunch of yen buyers out there," said Peter Lucas, investment strategist at Ashburton (Jersey). "The trend does seem for the dollar to be down against the yen."

Electronics makers have driven rises in the Nikkei stock index since the beginning of June and any declines by those companies will weigh on the benchmark more heavily than those by other sectors.

Exporters face further risks after Federal Reserve Chairman Alan Greenspan indicated that the US central bank was ready to increase interest rates again to slow economic growth.

Yet comments made earlier by Japanese Finance Minister Kiichi Miyazawa indicated that the BOJ may try different methods to curb the yen's rise and possibly benefiting exporters. "If the yen stabilises, it will calm the nerves," said Mr Allum.

Investors may watch for further details about a public works spending package which Mr Miyazawa said the government might release around 10 September. And they will watch for the June unemployment number to see if companies are cutting staff as part of restructuring measures.