Investors Shun Japan Bonds

Japan failed Friday for the first time to find buyers for all the 10-year bonds it put up for sale at an auction, reflecting investor concerns about the government’s resolve to fix the nation’s economic problems.

The Finance Ministry’s surprising announcement on the auction of the government’s key long-term securities sent government bond prices spiraling lower and their yields soaring.

Taken with a weakening yen and falling stocks, the bond market drop stoked fears of a temporary flight from Japanese markets.

The ministry offered $14.6 billion in 10-year bonds in the auction but was able to sell only $11 billion, or 75%. The bonds offered annual yields of about 1.2%.

It was the first time the ministry didn’t sell all its 10-year bonds since it introduced the auction system in 1988, officials said.

In Tokyo on Friday, the Nikkei stock index fell nearly 2% and the yen tumbled against the dollar and euro. Standard & Poor’s Corp., though critical of recent moves by the Japanese government, said it would not lower the country’s credit rating for the time being.

The bond market’s woes Friday contrast sharply with its popularity in recent months. With stocks recently hitting 19-year lows, long-term bonds have been the securities of choice for investors in Japan, just as American investors have snapped up U.S. Treasuries.

Only a week ago, Japanese 10-year bond yields hit four-year lows of 1.04%. By late Friday, investors were demanding 1.3% on existing securities.

Analysts said Friday’s auction bombed because Prime Minister Junichiro Koizumi’s government has not yet shown its resolve to turn the economy around by tackling deflation and banks’ huge bad loans.

Traders said some investors were buying short-term Japanese government securities or swapping Japanese bonds for euro bonds.

The market downswing comes despite the Bank of Japan’s unprecedented plan, announced Wednesday, to help banks get rid of their bad loans and prop up the financial system by buying stocks they own.

Although Japan’s downturn appears to have bottomed out and signs of better times have appeared, unemployment is soaring and deflation continues to plague the economy.

Associated Press

Mexico’s Peso Falls

on Strike Concerns

Mexico’s peso fell to new 44-month lows against the dollar Friday amid concerns about Brazil’s market turmoil, a possible war in Iraq and strike threats at Mexico’s state oil monopoly Pemex, analysts said.

With losses Thursday as well, the peso has declined almost 3% in the last two days of trading.

The currency closed Friday at 10.31 to the dollar, down from Thursday’s close of 10.18 and its lowest level since January 1999.

The peso’s weakening has been attributed mostly to a slump in U.S. and local stocks, as well as concerns about the outcome of Brazil’s upcoming elections.

But concerns about a possible Pemex strike have aggravated the external factors, said Gabriel Sod-Hoffs, a currency strategist at J.P. Morgan.

“We don’t expect there to be a strike, but the concerns reflect the difficult political environment in Mexico at the moment,” Sod-Hoffs said.

But Mexico’s main stock market index, which dropped 5.3% on Thursday, regained some of that loss Friday, ending up 2.6% at 5,788.78, in what traders described as a technical rebound and bottom fishing for Mexican blue-chip shares.

The stock market reversed a five-session losing streak, but the main index still shed 6.5% for the week.

At state oil giant Pemex, there are concerns that workers could go on strike Oct. 2, crippling operations for one of the world’s largest producers of crude.

Some investors are worried that the government could buckle to union demands for a 15% wage hike.

The continuing slide of Brazil’s currency, the real, amid mounting concerns that leftist candidate Luiz Inacio Lula da Silva will win presidential elections next month also has weighed on Mexican financial markets, analysts say.

Reuters, Associated Press