Investors were caught off guard Monday morning as the Japanese stock market rose, forcing speculators to cover their positions. Meanwhile, the yen continued strengthening for what may be the 10th day in the last 11--at one point reaching a four-month high against the dollar.
Japan's benchmark Nikkei-225 stock average was up 2.76% in early trading to close the morning session at 14,430.67, up 387.76 points, while the Japanese currency strengthened by over 2 yen against the dollar to trade near the 132 level.
The strong showings did not appear to be tied to Friday's meeting between Treasury Secretary Robert Rubin and Finance Minister Kiichi Miyazawa in San Francisco, or to warnings by Federal Reserve Board Chairman Alan Greenspan that the U.S. can't remain an "oasis of prosperity" indefinitely in a troubled world.
Rather, concerns about the dollar and internal market factors were cited.
"A lot of people have been short on the yen because they thought it would go to 160, 180 or even 200," said Charles Lambert, market analyst with Jardine Fleming Securities. "As the yen moves up, up, up, they don't want to get squeezed any longer."
Using this window of opportunity, Japanese authorities jumped on the chance to talk up the yen as Finance Administrative Vice Minister Eisuke Sakakibara told investors that the yen is still undervalued.
Analysts cite several technical factors behind the sudden rise in Japanese asset valuations. But they said the world may also be seeing a modest fundamental shift as well.
On the technical side, Japanese banks, insurance companies and corporations are starting to sell U.S. stocks in advance of Japan's Sept. 30 end-of-quarter reporting period and repatriating their profits into yen.
Global hedge funds that reportedly borrowed yen to finance their global investment plays are now repaying their yen debts as their emerging market investments sour. And investors who took short positions on Japanese stocks--essentially a bet that stocks will go down--are now rushing to stem their losses.
But a key question that is still to be answered is whether the yen's 10% strengthening in a matter of days may signal a more fundamental transition.
"Currencies are always hard to read, but this does have the feel of a fundamental shift," said Garry Evans, strategist with HSBC Securities Japan.
If the U.S. does lower interest rates, Evans said, this will reduce the interest rate gap to about 2.5% from 3% earlier this year, making Japan relatively more attractive.
Masahiko Senda, an analyst with New Japan Securities Research Center, said the Rubin-Miyazawa meeting was relatively less significant than Greenspan's speech in San Francisco. A few weeks ago, there was almost no chance of a U.S. interest rate cut, but now he pegs it at 50-50 within the next few months.
"It used to be that this was just a Japan or Asian or Russian problem, but no longer just Asian problem with Latin America now on fire," he said. Washington and Tokyo may now realize they need to move more quickly to develop joint policies to address global problems, he said.
The markets have increased pressure on Japan to sort out its policy problems quickly. U.S. Deputy Treasury Secretary Lawrence Summers told television viewers Sunday that it is vital for Japan to bolster its economy through concrete actions, including fiscal policy, tax cuts and banking system reform.
But Shigeo Watanabe, an independent Japanese economist, said a perception gap exists between Japan and the rest of the world. In countries like the United States, the president has broad-based authority to quickly enact economic policies, at least involving international issues. In Japan, however, the parliamentary system and the power struggle between the opposition and the government make such rapid implementation difficult.
"We're getting closer, but it's still a slow process from a foreigner's point of view," he said.
Analysts said a U.S. interest rate cut would also have relatively small effect on Japanese markets, given how low interest rates here already are--about 0.5%.