Gold Jumps to All-Time High on Concern About Inflation, Weakening Dollar

Gold rose to a record in New York and London as a weaker dollar and concerns about inflation and European debt boosted demand for the metal as an alternative investment. Silver climbed above $40 an ounce to a 31-year high. 

The European Central Bank yesterday lifted interest rates for the first time in almost three years to quell inflation even as Portugal sought a bailout. The dollar slid to the lowest level since December 2009 against six major currencies. Gold, which typically moves inversely to the greenback, has climbed on fighting in Libya and Japan’s earthquake and tsunami last month. 

“Inflation expectations are rising,” Walter de Wet, an analyst at Standard Bank Plc in London, said today by phone. European debt issues are “certainly adding support. Most of the rally the past few days has been on the back of the dollar weakening.” 

Gold futures for June delivery gained as much as $15.20, or 1 percent, to $1,474.50 an ounce and traded at $1,472.80 by 8 a.m. on the Comex in New York. Prices are up 3.1 percent this week, the most since December. The metal for immediate delivery in London was 0.9 percent higher at $1,471.56 after reaching $1,473.07. 

Gold futures reached a record 21,320 rupees ($483.70) per 10 grams (0.3 ounce) on the Multi Commodity Exchange of India Ltd. The country is the biggest gold consumer.

Libyan Stalemate

U.S. Army General Carter Ham, who commanded the opening phase of the allied military operation in Libya, yesterday said the overall conflict is settling into a stalemate between regime forces and rebel fighters. North Atlantic Treaty Organization commanders are deploying more warplanes in their effort to halt forces loyal to Muammar Qaddafi. 

The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for inflation, widened to as much as 2.62 percentage points, the most in 33 months.

“Geopolitical risk in the Middle East and Africa, deepening inflation and the Black Swan risk of natural disasters” is boosting precious metals, GoldCore Ltd. analysts in Dublin said in an e-mail. “The gold and silver markets are experiencing a perfect storm. Debt concerns in the euro zone and in the U.S.” are supporting prices, the analysts said. 

President Barack Obama said he hopes lawmakers can reach a last-minute deal today to avert a government shutdown after a third round of talks with congressional leaders last night failed to end an impasse over the federal budget. 

Japan’s biggest aftershock since the March 11 earthquake yesterday left two dead and millions without power in the areas hit hardest by last month’s tsunami. The magnitude-7.1 temblor hindered efforts by Tokyo Electric Power Co. to prevent hydrogen explosions at its Fukushima Dai-Ichi nuclear plant.

Silver Surges

Silver for May delivery in New York climbed as much as 2 percent to $40.335 an ounce, the highest level since January 1980, the year futures reached a record $50.35. It last traded at $40.29. An ounce of gold bought as little as 36.48 ounces of silver in London today, the least since September 1983, data compiled by Bloomberg show. 

Silver held in exchange-traded products rose 27.57 metric tons to 15,423.09 tons yesterday, the highest level since at least February 2010, data compiled by Bloomberg from four providers show. 

Investors perceive silver as “a cheap vehicle with characteristics similar to gold as a store of value,” Morgan Stanley said in a report to clients today. The metal will average $31.39 an ounce this year, up 20 percent from a previous forecast, the bank said. 

Palladium for June delivery was up 2.7 percent at $801.35 an ounce after touching a one-month high of $804. Platinum for July delivery gained 1.6 percent to $1,818.70 an ounce. It earlier today reached $1,822.10, the highest price since March 7. 

Source: Bloomberg By Nicholas Larkin 

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Canada Dollar Rises to the Strongest Level Since 2007 as Oil Price Surges

Canada’s dollar appreciated to the strongest level in more than three years against its U.S. counterpart as crude oil, the nation’s largest export, rose above $111 a barrel for the first time since 2008. 

Canada’s currency briefly pared gains after a government report showed the economy unexpectedly lost jobs for the first time in six months in March. Oil rose as a fire burned at Libya’s Sarir field, bolstering concern that unrest in the region will further reduce supply. The U.S. dollar weakened against 14 of its 16 most-traded peers. Global stocks gained. 

“Equity markets are up, the U.S. dollar is weak and commodities are booming, which is a formula for Canadian dollar strength,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “Canada’s data numbers are the second story.” 

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, strengthened 0.3 percent to 95.50 cents per U.S. dollar at 9:39 a.m. in Toronto, from 95.82 cents yesterday. It touched 95.27 cents, the strongest since 2007. 

Crude oil for May delivery rose 0.8 percent to $111.20 a barrel in New York. It touched $111.90 a barrel, the highest since September 2008. Gold for June delivery surged to a record $1476.80 an ounce.

Raw Materials

 

The Thomson Reuters/Jefferies CRB Index of raw materials gained for the seventh consecutive day, increasing 0.5 percent. 

Raw materials, including oil and gold, account for about half of Canada’s export revenue. 

The MSCI World Index increased 0.6 percent, while the Standard & Poor’s 500 Index gained 0.3 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against six of its major trading partners including the Canadian dollar, fell to 75.061, the lowest level since December 2009. 

Employment fell by 1,500 last month, Statistics Canada said today in Ottawa. The number was lower than forecast by all 25 economists in a Bloomberg News survey that had a median estimate of a 28,000 gain. The unemployment rate declined to 7.7 percent from 7.8 percent as predicted, as the labor force shrank by 14,900 people. 

Canada’s dollar remained higher after the report as investors focused on the 90,600 gain in full-time work, the biggest since September 2009. The increase almost matched the 92,100 drop in part-time employment, which was the biggest in records dating to 1976. 

“There’s a broader trend of a weak U.S. dollar so the market was quick to dismiss Canadian employment,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. 

Canadian government bonds fell, pushing the yield on the benchmark 10-year note up four basis points, or 0.04 percentage point, to 3.47 percent. The price of the 3.5 percent security maturing in June 2020 dropped 27 cents to C$100.24. 

Source: Bloomberg By Alexandra Harris  

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Euro Falls From Four-Month High Reached on ECB Interest Rate Speculation

The euro fell against the dollar from the highest level in almost four months as European Union leaders failed to solidify a permanent bailout mechanism during a summit ended yesterday. 

Declines in the 17-nation currency this week were limited by speculation the European Central Bank will increase interest rates in April. The dollar fell against currencies linked to commodities, with the Australian dollar strengthening to the most versus its U.S. counterpart since foreign-exchange controls ended in 1983, before a report that may show U.S. private employers added 222,000 jobs in March. 

“EU leaders, they sound fairly optimistic no country after Portugal may need a bailout, but it’s too early to say that for sure and I don’t see any justification for euro to be up even this high,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “The market continues to have fairly good risk appetite, despite the turmoil going on.” 

The euro fell 0.7 percent to $1.4088 in New York, from $1.4182 in the week ended March 18. It touched $1.4220 on March 22 the highest level since Nov. 5. The shared currency fell to 114.59 yen, from 114.31. The dollar strengthened versus the yen to 81.34, from 80.58.

Euro Trends

The euro weakened 0.5 percent against a basket of nine- developed nation currencies in the past week, according to Bloomberg Correlation Weighted Indexes. Futures show traders added to bets on higher borrowing costs in the region, with the implied yield on the three-month Euribor contract expiring in September rising 0.2 percentage point to 1.83 percent. 

Jean-Claude Trichet, the ECB President, told the European Parliament March 21 he has “nothing to add” to his March 3 remarks when he said policy makers may raise the benchmark rate from a record low of 1 percent at their next meeting April 7. The Federal Reserve remains committed to keeping short-term interest rates low for an extended period. 

EU leaders were divided about how to get the euro-region stopgap fund up to its capacity of 440 billion euros ($624 billion) to ease credit woes. European leaders pushed back the decision on funding a bailout mechanism to June.

‘A Little Wary’

“European leaders have shown that in crisis times they can get things done,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “However, people are a little wary at this point.” 

Fitch Ratings cut Portugal’s credit rating after the nation’s Prime Minister Jose Socrates resigned March 23.

Two European officials said a bailout for Portugal may total as much as 70 billion euros. Portugal made up about 1.8 percent of the total 17-nation euro-zone gross domestic product in the fourth quarter last year, according to Eurostat, the EU’s statistics office, and Bloomberg data, while Ireland accounts for 1.8 percent and Greece makes up 2.3 percent. 

Portugal hasn’t asked for a bailout and the figures are preliminary, the officials said. The action would follow Greece and Ireland’s request of aid from the EU and the International Monetary Fund.

Dollar Index

The Dollar Index, which tracks the currency against six major trading partners, rose 0.6 percent to 76.151, from 75.718. The dollar fell on a weekly basis against the New Zealand, Australia, South African and Canadian currencies as the price of raw materials surged. 

The Reuters/Jefferies CRB Index jumped 2.2 percent, the biggest weekly gain since March 4.

Australia’s dollar rose as much as 0.8 percent to $1.0294 yesterday, as technical levels were triggered.

“There were a lot of orders sitting above the $1.0255-60 level and so when it broke the level a lot of stops were triggered and we saw a very very quick move,” said Kathy Lien, director of currency research with online currency trader GFT Forex in New York. Traders place automatic buy and sell orders, known as stops, at predetermined prices to limit losses. 

The yen fell for the first time in three weeks against the dollar in the week after the Group of Seven nations intervened to bring the currency down from a postwar high.

Yen Path

The yen surged to a post-World War II high of 76.25 versus the dollar on March 17 after a 9.0-magnitude earthquake and tsunami struck Japan on March 11, damaging cooling systems at a nuclear-power plant north of Tokyo. 

Switzerland’s franc fell against all its major counterparts last week. The move follows the franc’s biggest five-day gain versus the greenback since June, as investors sought a haven amid lingering tensions in the Middle East, according to the Swiss National Bank. 

The franc weakened 2.1 percent to 91.99 centimes per dollar, after gaining 3.1 percent the week ended March 18. 

“The franc was just overdone and now we’re seeing a move the other way,” said Tim O’Sullivan, chief trader at FOREX.com, a unit of the online currency trading company Gain Capital in Bedminster, New Jersey. “I still think it’s a good play to buy Swiss and sell dollars in this environment.” 

The pound fell against most of its major counterparts, excluding the franc, after the Bank of England minutes showed policy makers voted 6-3 to keep rates steady on March 10 and saw “merit in waiting” to assess the effect of higher oil prices on the economy. 

The currency was also pressured as Chancellor of the Exchequer George Osborne said the British economy will more grow more slowly this year than previously forecast. The Office for Budget Responsibility predicts annual growth in 2011 of 1.7 percent, down from the 2.1 percent forecast in November, Osborne said.

Britain’s currency fell 1.2 percent to $1.6042, from $1.6234 the previous week. 

Source: Bloomberg By Allison Bennett 

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Japan’s Recession Threat Lessens Following G-7’s Joint Intervention on Yen

Japan’s risk of becoming the first Group of Seven member to return to a recession after the global financial crisis eased as the G-7 intervened to halt the yen’s appreciation. 

The G-7’s yen sales sent the currency down the most since September, to 80.58 per dollar at the close yesterday in New York, compared with the postwar high of 76.25 reached March 17. Japan’s Vice Finance Minister Fumihiko Igarashi said in an interview “we confirmed” further intervention could be done. 

“The risks to the downside for Japan’s economy were reduced significantly by the G-7 intervention,” said Takuji Aida, a senior economist at UBS AG in Tokyo. “This coordinated action may help corporate sentiment to recover, a key factor in reviving growth, along with public spending.” 

Reduced scope for yen gains would limit damage to exporters’ earnings once companies from Toyota Motor Corp. to Sony Corp. restart factories. Focus now turns to the duration of electricity cuts in the aftermath of the nation’s record earthquake. At the crippled Fukushima Dai-Ichi nuclear power plant, engineers worked to restore power used for pumps needed to protect fuel rods from overheating and releasing radiation.

Paring Loss

The Nikkei 225 (NKY) Stock Average closed 2.7 percent higher yesterday, paring its slide since the disaster to 12 percent. The tumble in equities in the aftermath of the quake, in conjunction with the rising yen, threatened to impair companies’ balance sheets ahead of the March 31 close to the fiscal year. 

To aid companies with fund-raising concerns, Prime Minister Naoto Kan’s government may provide more than 10 trillion yen ($124 billion) of loans, the Nikkei newspaper reported without saying where it obtained the information. 

Japan’s economy, the world’s third biggest, may skirt a contraction and grow about 1 percent this year as the nation rebuilds after the March 11 temblor and tsunami, according to UBS and Nomura Holdings Inc. 

The Federal Reserve, European Central Bank, Bank of England, Germany’s Bundesbank, the Bank of France, the Bank of Canada and the Italian central bank said they joined the yen sales. A Japanese government official said on condition of anonymity that his country probably sold less than 2 trillion yen, the amount it used in its last intervention. Yesterday’s drop in the yen was the biggest since Japan’s unilateral sales on Sept. 15.

‘Very Problematic’

“The risk of the yen rising unchallenged to uncompetitive levels would have been very problematic in an economy where, outside of export dynamism, there’s really been very little dynamic for growth,” said Richard Jerram, head of Asian economics at Macquarie Securities Ltd. in Singapore. The intervention is “a significant help” to the economy, he said. 

Japan’s economy had already shrunk in the fourth quarter of 2010 as government stimulus measures adopted during the global financial crisis were phased out. The nation has suffered limited growth and sustained declines in consumer prices as an aging and shrinking population undercut domestic demand. 

Every one yen that the currency appreciates against the dollar erodes about 30 billion yen from Toyota’s earnings, according to the company. Honda Motor Co., which produces more than 70 percent of its vehicles outside Japan, loses 17 billion yen for each yen the currency strengthens. 

“We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake,” Igarashi said in the interview in Tokyo March 18. He added that he hoped the G-7 action would put a floor under the currency.

Yen’s Climb

The yen has appreciated 3 percent against the dollar since the close the day before the magnitude-9 quake. The currency, which has now strengthened 19 percent in the past two years, rose in recent days on speculation Japan’s insurers would repatriate overseas assets. Economic and Fiscal Policy Minister Kaoru Yosano has said there was no basis for such speculation. 

Nomura analysts see the economy expanding 1.1 percent this year, 0.4 percentage point less than their estimate before the disaster struck. The earthquake and tsunami ripped apart northeastern towns, killing thousands and damaging nuclear reactors at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. Almost 400,000 people remained in evacuation shelters yesterday. 

Soldiers and firefighters from Tokyo, using dozens of fire engines, doused sea water on reactor No. 3 yesterday, after an explosion this week. TEPCO also said it may finish reconnecting a power line to the No. 2 reactor. 

U.S. Optimistic 

Admiral Robert Willard, head of the U.S. Pacific Command, said he was cautiously optimistic that the damage can be contained and a “worst-case scenario will never be encountered.” 

The risks to an economic recovery include an uncertain power supply, with the nation facing rolling blackouts and Citigroup Inc. warning this week that the nation may face an “irreversible” blow to capacity. Household sentiment has also suffered. 

“Japan has little choice but to rely on exports as consumer spending will likely stay weak,” said Junko Nishioka, chief economist at RBS Securities. “Service consumption will likely slump even in the Tokyo area as consumers may be discouraged from going out because of the confusion resulting from the earthquake, such as the power shortage,” she said. 

Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year. 

The central bank yesterday repeated its pledge to pursue “powerful monetary easing” and added 3 trillion yen to the financial system, bringing its total emergency fund injections this week to 37 trillion yen. On March 14, it doubled an asset- purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts. 

Source: Bloomberg By Keiko Ujikane and Michael Heath 

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Yen Strengthens as Japan's Risk of Radiation Leaks Spurs Demand for Refuge

The yen rose against all of its major counterparts as increased risk in Japan of radiation leaks from a crippled nuclear power station boosted speculation that investors will repatriate assets to pay for earthquake damages. 

The dollar rose and the Swiss franc advanced to a record against the greenback on demand for a refuge as Japan’s Prime Minister Naoto Kan said his government is doing everything it can to contain the radioactive leaks following last week’s earthquake and tsunami. The euro was lower as European Central Bank President Jean-Claude Trichet called “insufficient” a package of economic-oversight rules adopted by European Union finance ministers. 

“It definitely looks like a difficult day for the global financial markets and we see the safe-haven currencies outperforming,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There’s been some further worrying news from Japan in terms of the situation at the nuclear plant facility.” 

The yen appreciated 1.8 percent to 112.16 versus the euro at 8:55 a.m. in New York, from 114.22 yesterday. The yen advanced 1 percent to 80.79 per dollar, from 81.63. The Japan currency strengthened to almost 80.22 reached Nov. 1, the strongest since April 1995 when it reached a postwar record of 79.75.

The dollar strengthened 0.8 percent to $1.3883 against the euro, from $1.3992.

Dollar Strength

Stocks and U.S. futures sank, with the Nikkei 225 index posting its biggest two-day drop since 1987. The MSCI World Index fell 2.3 percent while Standard & Poor’s 500 Index futures tumbled 2.7 percent. 

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, rose as much as 0.9 percent to 77.04 in the biggest intraday gain since Feb. 3. 

The franc appreciated 0.4 percent to 92.07 centimes per dollar after touching 91.98, the strongest level since at least 1971, when Bloomberg records begin. 

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most traded currencies excluding the yen, dropped to the lowest level this month on concern related to Japan’s earthquake. 

Currencies of commodity-exporting countries plunged as speculation increased the explosions at the nuclear power station will damp demand for raw materials. 

South Africa’s rand, the worst performer among the major currencies, dropped 2.9 percent to 7.0176 per dollar. 

Australia’s dollar weakened 2.6 percent to 98.38 U.S. cents and Canada’s currency fell 1.9 percent to 99.27 cents per U.S. dollar.

‘Increasingly Alarming’

“It’s increasingly alarming, the state of the situation in Japan,” said Paul Mackel, a currency strategist at HSBC Holdings Plc in London. “When the market goes into a very aggressive risk-off move, these currencies tend to underperform.” 

Malaysia’s ringgit slid 0.8 percent to 3.0615 per dollar, according to data compiled by Bloomberg. South Korea’s won and the Philippine peso weakened 0.5 percent. 

Japan’s stricken Dai-Ichi nuclear power plant was rocked by two further explosions and a fire today as workers struggled to avert the risk of a meltdown. 

A hydrogen blast hit the plant’s No. 4 reactor, where Tokyo Electric Power Co. earlier reported a blaze, Japan’s Chief Cabinet Secretary Yukio Edano said at a briefing. Four of the complex’s six reactors have been damaged by explosions after cooling systems failed when they were wrecked by the magnitude 9 earthquake and deadly tsunami.

Central Bank Action

Further gains in the yen may be limited as the Bank of Japan pumps more money into financial markets, according to analysts at BNP Paribas SA. 

“The BOJ will have to take a bigger responsibility to fund the rebuild of the Japanese economy, suggesting it will intensify its quantitative-easing program,” BNP analysts including Hans-Guenter Redeker, global head of currency strategy in London, wrote in an e-mailed report today. “The projected boost of the BOJ’s balance sheet should work against the yen.” 

The BOJ added 5 trillion yen to the financial system in a one-day operation today. BOJ Governor Masaaki Shirakawa has pledged to keep pouring cash into the economy to stabilize markets. The bank injected 15 trillion yen ($6 billion) yesterday and doubled its asset-purchase program to 10 trillion yen, an increase that’s about one-tenth the size of the Fed’s program of buying Treasuries.

German Index

The euro stayed lower versus the dollar as the ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations dropped to 14.1 this month from 15.7 in February. Economists had expected a gain to 15.9, according to the median forecast of 38 economists in a Bloomberg News survey. 

ECB President Trichet was critical as euro-zone leaders negotiated an accord to allow primary-market bond purchases that will offer a lifeline to aid recipients in return for austerity commitments. Leaders will allow the facility to spend its full 440 billion-euro capacity, removing restrictions that would have capped outlays at about 250 billion euros ($350 billion), though it won’t be used to finance bond buybacks for debt-strapped states. 

“We continue to think that the improvement in governance that is presently envisaged is in our opinion insufficient to draw the lessons from the crisis,” Trichet told ministers at a meeting in Brussels today where the measures were approved. 

A final agreement is slated for a summit on March 24-25. 

Source: Bloomberg By Catarina Saraiva and Keith Jenkins 

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Japan Faces ‘Another Leg Down’ in Its Fiscal Health After Quake

The cost of rebuilding from Japan’s strongest earthquake on record will worsen the country’s challenge of reining in the world’s biggest public debt even as damage to the economy may be limited, analysts said. 

The 8.9 magnitude shock devastated areas of northeast Japan including parts of Sendai, a city of 1 million that’s 300 kilometers (186 miles) north of Tokyo. The Tohoku region accounts for about 8 percent of gross domestic product, is host to factories making products from cars to beer, along with energy infrastructure including a nuclear power plant the government said is at risk of meltdown after an explosion. 

Factory shutdowns, power cuts and the damage to consumer confidence may hurt Japan’s GDP for a period of months, while later contributing to growth as rebuilding occurs, economists said. Paying for the rebuilding risks hurting demand for Japanese government bonds, said Alicia Ogawa. 

“A supplementary budget is like the last thing that people watching the JGB market want to hear,” said Ogawa, adjunct professor at Columbia University’s School of International and Public Affairs in New York, and a former Japanese banking analyst who lived in the nation for 15 years. The prospect of rebuilding “signals another leg down in Japan’s fiscal health. So I’m concerned that in the short to medium run, there’s going to have to be more borrowing,” she said.

Debt Load

The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1. That signaled Prime Minister Naoto Kan would break his pledge to limit bond sales to 44.3 trillion yen a year. 

For Kan, the task of assembling a reconstruction plan adds to a burden that includes his failure so far to persuade opposition lawmakers to enact bills allowing the government to sell deficit-financing bonds in the coming fiscal year. The largest opposition party has signaled it’s prepared to endorse post-earthquake spending. 

“We will probably need a supplementary budget to work on this,” Sadakazu Tanigaki, who heads the Liberal Democratic Party, told reporters yesterday after Kan convened a meeting of party leaders. “We will cooperate with all our might.” 

Japan’s bond market has so far failed to signal concern at the fiscal outlook, with more than 90 percent of government debt held by domestic investors led by financial companies. The yield on the benchmark security due in 2021 was 1.27 percent late yesterday in Tokyo, compared with an average of 1.39 percent over the past decade.

Risk to Yields

“This situation is likely to reverse as the government ramps up spending -- and deficit financing -- to repair the damage,” Dan Ryan, an economist at Lexington, Massachusetts- based IHS Global Insight. “Considering that Japan’s sovereign debt was recently downgraded, financial markets may become more wary of even an incremental increase in government borrowing and bond issuance.” 

Japan’s rating outlook was lowered to negative from stable by Moody’s Investors Service Feb. 22 on concern that political gridlock will constrain efforts to tackle the debt burden. The ranking is Aa2, the company’s third highest. Standard & Poor’s cut its grade in January to fourth highest. 

Stocks already began to respond to the quake, with the Nikkei 225 (NKY) Stock Average tumbling 1.7 percent by the close March 11, which came 14 minutes after the 2:46 p.m. strike of the main earthquake, which has been followed by scores of aftershocks.

Refinery Fire

Companies from Sony Corp., Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. to beermaker Sapporo Holdings Ltd. and refiner JX Nippon Oil & Energy Corp. shut down facilities in northern Japan. Cosmo Oil Co. suffered a fire at a refinery in Chiba, outside Tokyo, while Tokyo Electric Power Co. battled to avert a meltdown to a nuclear power station 220 kilometers north of Tokyo after cooling systems failed. 

The devastation has caused the death of at least 500 people, with more than 700 people reported missing as of the afternoon March 12. Kan, returning from an inspection of the devastated area around Sendai said he would mobilize 50,000 Self Defense Force personnel to aid the relief effort. 

In Tokyo, residents emptied supermarket shelves and steeled themselves for a potential power outage flagged by Tokyo Electric Power. 

“The quake and the tsunami are a tragic devastation, but they will have only minimal impact on the Japanese economy overall,” said Michael Boskin, a Stanford University economics professor in Stanford, California, and former head of the White House Council of Economic Advisers. “When there are natural disasters, there’s a big disruption of capital and, tragically, life as well that will require capital to rebuild and so on. But it’s not widespread enough to disrupt” GDP very much, he said.

GDP Call

JPMorgan Chase & Co. for now maintained its projection for 2.2 percent annualized gains in GDP for the first and second quarters of 2011, in a March 11 research note. 

Provided the danger to the nuclear reactor is defused, “something several magnitudes lower than the 1.9 percent GDP impact” of the January 1995 Kobe earthquake is likely, London- based ING Financial Markets analysts Rob Carnell and Tom Levinson wrote in a note. “One potential fly in the ointment, is that in 1995, although seriously challenged, Japan’s fiscal situation was not in such a parlous state as it is today.” 

For its part, the Bank of Japan pledged to ensure financial stability, setting up an emergency task force and saying it will do everything to provide liquidity. Meantime, the Ministry of Finance may be prompted to intervene in the foreign exchange market should the nation’s currency climb and risk worsening deflationary pressures and undermining export competitiveness, analysts said.

Intervention Risk

The yen advanced 1.4 percent to 81.84 per dollar March 11, bringing its appreciation over the past year to about 10 percent. The yen typically climbs during crises because Japan’s current-account surplus means it doesn’t need foreign funding and because of the likelihood of Japanese investors repatriating assets. Japan holds $882.3 billion of Treasuries, the highest tally after China, according to the U.S. Treasury. 

“Insurance companies are unlikely to buy overseas assets aggressively while they worry about pending claims” stemming from the earthquake, Mansoor Mohi-uddin, the head of global currency strategy at UBS AG who was in Tokyo for visits with clients and present for the earthquake, wrote in a note. He predicted that the yen won’t strengthen past 80, citing the likelihood of authorities selling the currency to stem gains. 

The earthquake hit at a point when the economy was pulling out of a contraction in the fourth quarter. Recent data showed factory orders increased 4.2 percent from December, the biggest jump in five months, industrial production rose in January and the unemployment rate held that month at 4.9 percent, matching the lowest level since March 2009.

Legacy of Debt

Japan’s borrowing burden is a legacy of economic stagnation following the bursting of its stock and property bubble in 1990. Financial-industry bailouts and repeated attempts to revive growth through fiscal stimulus contributed. The debt is set to reach 210 percent of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent for the U.S. 

One potential positive from the earthquake is the chance to revive a less-populated area of the nation. Provincial regions outside of Tokyo have borne the brunt of the decline in Japan’s population since 2006. The prefectures of Akita and Aomori, within Tohoku, have had the biggest decline in residents in the five years through 2010. Miyagi, where Sendai is located, accounts for 1.7 percent of the nation’s people, according to economist Richard Jerram at Macquarie Securities Ltd. 

“This is a Keynesian stimulus program that nobody can argue with: just rebuilding the city of Sendai,” said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington, co-author of the 2001 book “No More Bashing: Building a New Japan-United States Economic Relationship.” “Rebuilding Sendai could actually be an opportunity to try to create a growth pole in northern Japan.” 

Source: Bloomberg By Christopher Anstey 

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U.K. Pound Falls Against Dollar After BOE Holds Key Rate at a Record Low

The pound fell to its weakest level this month against the dollar as the Bank of England kept interest rates at a record low to safeguard the economy even with inflation at twice its target.

Sterling has declined in five of the past six trading days against its American counterpart. Officials held the main rate at 0.5 percent, as predicted by all 61 economists surveyed by Bloomberg News. The bank’s decision to maintain its bond holdings at 200 billion pounds ($323 billion) was also anticipated by economists in a separate survey. U.K. gilts rose as investors reduced bets on higher rates and declines in equities boosted demand for safer assets.

“There might have been some pricing of a move, so obviously when it didn’t happen sterling weakened slightly,” said Steven Barrow, London-based head of research for Group-of- 10 currencies at Standard Bank Plc. “The economy remains somewhat fragile, and that’s going to weigh on sterling.”

The pound depreciated 0.7 percent to $1.6085 at 2:07 p.m. in London, after weakening to $1.6064, the lowest level since Feb. 25. It was little changed at 85.90 pence per euro. Prior to today, the pound had gained 3.8 percent against the dollar this year amid mounting pressure on policy makers to raise the key rate as inflation persists above their 2 percent target. Inflation accelerated to 4 percent in January.

‘Futile Gesture’

Policy makers are seeking to balance their mandate to curb price increases with the danger of the economy slipping back into a recession after output shrank 0.6 percent in the fourth quarter. Bank of England Governor Mervyn King said this month that raising rates too soon would be a “futile gesture.”

Details of policy makers’ deliberations will be released on March 23, when minutes of the meeting that ended today are published. The government’s statistics office is scheduled to release February’s inflation data a day earlier. Three of the nine-member Monetary Policy Committee voted to raise the benchmark-interest rate to tame inflation at last month’s meeting.

Short-sterling contracts climbed, pushing the implied yield on the contract maturing in June down one basis point to 1.08 percent, as investors pared bets that borrowing costs will rise. The Bank of England hasn’t adjusted rates since March 2009.

Gains in government bonds pushed the 10-year gilt yield five basis points lower to 3.61 percent. The 4.75 percent security due March 2020 rose 0.420, or 4.2 pounds per 1,000- pound face amount, to 108.69. 

Source: Bloomberg By Lukanyo Mnyanda and Emma Charlton 

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