Thread: Asian News

Japan's Bonds Drop, Pushing 10-Year Yield to Highest Since 2004

March 2 (Bloomberg) -- Japan's bonds fell, pushing 10-year yields to the highest since September 2004, as an inflation report tomorrow may support the case for the central bank to pump less money into the economy.

Bonds are set to drop for a second week on concern the Bank of Japan will shift policy at a two-day meeting that starts March 8 and raise interest rates from zero by year-end. Core consumer prices in January had the biggest gain since March 1998, according to the median estimate of economists surveyed by Bloomberg News.

``Investors are reluctant to buy bonds before the price report and the BOJ meeting,'' said Yasunori Kuroda, who helps manage fixed-income assets in Tokyo at Sompo Japan Insurance Inc., the nation's No. 3 casualty insurer. ``I see a more than 50 percent chance for a policy shift next week.''

The yield on the benchmark 1.6 percent bond due in December 2015 rose 3 basis points to 1.63 percent, as of 3:03 p.m. in Tokyo, according to Japan Bond Trading Co.

Ten-year yields earlier rose to 1.64 percent, the highest since Sept. 8, 2004. The price dropped 0.254 yen, or 254 yen per 100,000 yen face amount, to 99.746 yen.

Kuroda said he is keeping the average duration of his debt shorter than the benchmark he uses to gauge performance. Duration measures sensitivity to changes in interest rates, and the lower an investment's duration, the less it loses when yields rise.

Futures

Three-month Euroyen futures indicate traders are betting that the central bank may raise interest rates by 25 basis points from near zero percent in the last quarter of this year.

Contracts for December 2006 delivery yielded 0.575 percent today, up from 0.415 percent a month ago. Euroyen futures settle to three-month Tokyo interbank lending rates that averaged about 0.51 percent when the BOJ kept its target for overnight lending rate at 0.25 percent from Aug. 11, 2000, to Feb. 27, 2001, according to data compiled by Bloomberg.

Five-year notes in February had the biggest monthly drop since September after Bank of Japan Governor Toshihiko Fukui on Feb. 23 said stable gains in core consumer prices are ``close at hand'' and the bank will ``immediately shift policy'' once it judges the right conditions have been met.

The bank has said it will keep its current policy until three conditions are met: core consumer prices stop falling for at least a few months; policy makers are sure they won't resume sliding; and the bank is confident about the economy's overall strength.

Core prices, excluding fresh food, rose 0.4 percent in January, according to the median estimate of 33 economists in a Bloomberg survey. Prices in December had the first back-to-back monthly gain since April 1998.

Japan's economy expanded 5.5 percent in the fourth quarter, compared with 1.4 percent growth in the previous quarter.

`Hard to Buy'

``People will probably find it hard to buy bonds ahead of the consumer-prices report,'' said Katsutoshi Inadome, a fixed-income strategist in Tokyo at Mitsubishi UFJ Securities Co., part of Mitsubishi UFJ Financial Group Inc., the world's biggest lender by assets. ``A strong trend of rising core prices will probably encourage people to reduce their bond holdings.''

Bond futures pared losses after the government's 1.9 trillion yen ($16.3 billion) auction of 10-year debt garnered higher demand than the sale last month.

``The auction results weren't as bad as some people had anticipated,'' said Tokyo-based Tomohiko Katsu, fixed-income strategist at Nikko Citigroup Ltd., the second-largest buyer at government debt auctions in the July to December period. ``Yields are high enough to attract some investors.''

Auction

The Ministry of Finance set a 1.6 percent coupon, the same as the prior month, on 10-year bonds. The auction drew bids worth 2.42 times the amount of debt sold, compared with a ratio of 2.29 at the previous sale on Feb. 2.

Bond futures for March delivery fell 0.06 to 135.80 as of the 3 p.m. close at the Tokyo Stock Exchange, paring losses from the day's low of 135.53.

Benchmark 10-year yields have risen more than 30 basis points since the current fiscal year started on April 1 on signs the economy is growing fast enough to end deflation.

A report on Feb. 28 showed industrial production rose for a sixth month in January, the longest expansion in nine years.

The government can't determine long-term interest rates, Japan's Finance Minister Sadakazu Tanigaki said in Tokyo.

Rates ``are not something that can be controlled politically,'' he said in parliament today.

To contact the reporter on this story:
Keiko Ujikane in Tokyo at kujikane@bloomberg.net

Last Updated: March 2, 2006 01:15 EST

Advertisement: $48 bil

AP

Japanese Stocks Fall; Dollar Rebounds

Thursday March 2, 3:26 am ET

Japanese Stocks Fall for Second Day on Lower Steel, Machinery Stocks; Dollar Rebounds

TOKYO (AP) -- Japanese stocks fell for a second day Thursday, dragged down by steel and machinery stocks. The dollar edged higher against the yen.

The benchmark Nikkei 225 index fell 54.70 points, or 0.34 percent, to 15,909.76 points the Tokyo Stock Exchange. The index lost 240.97 points, or 1.49 percent, the previous day.


Investors were also cautious ahead of Friday's release of consumer price figures. Signs that Japan is emerging from deflation, or falling prices, could spur the Bank of Japan to tighten its ultra-loose monetary policy in the near future.

Stocks moved higher for much of Thursday's session before investors sold steel and machinery stocks after some steelmakers revised downward their profit outlook for the fiscal year through March.

Among steelmakers, JFE Holdings Inc. dropped 3.98 percent to 4,180 yen ($36.03) after the company cut its group operating profit outlook. Nippon Steel Corp. fell 4.38 percent to 453 yen ($3.91).

Major machinery maker Okuma Holdings Inc. lost 3.18 percent to 1,362 yen ($11.74).

But auto stocks advanced on news of healthy auto sales in the United states.

Honda Motor Co., which posted a 9 percent increase in U.S. sales last month over a year ago, added 0.15 percent to 6,850 yen ($59.06). Toyota Motor Corp., whose U.S. sales rose 2 percent in February, rose 0.98 percent to 6,210 yen ($53.53).

The broader TOPIX, which includes all issues on the exchange's first section, shed 3.36 points, or 0.21 percent, to 1,632.24 Thursday. The index fell 24.82 points, or 1.49 percent, Wednesday.

In currency trading, the U.S. dollar was trading at 116.30 yen on the Tokyo foreign exchange market at 3 p.m. Thursday, up 0.23 yen from late Wednesday in New York. On Wednesday, the dollar fell to a one-month low of 115.45 yen.

The euro fell to $1.1920 from $1.1936 in New York.

The yield on the 10-year Japanese government bond rose to 1.6250 percent from Wednesday's close of 1.6000 percent. Its price fell 0.22 point to 99.78.

FOREX-Euro supported ahead of expected ECB rate rise

Thu Mar 2, 2006 6:13 AM ET166

By Carolyn Cohn

LONDON, March 2 (Reuters) - The euro edged towards the previous day's three-week high against the dollar on Thursday ahead of an expected euro zone interest rate rise and as investors awaited clues on the pace of future tightening.

The European Central Bank is expected to raise rates by 25 basis points to 2.5 percent at 1245 GMT, but with the decision unanimously expected, investors are keen to hear what the bank's president Jean-Claude Trichet has to say at a news conference at 1330 GMT.

The single currency has been stuck in a $1.18-$1.23 range since December and analysts say Trichet needs to sound upbeat to push the euro above the range, given U.S. rates are also seen heading higher in the near term.

"A 25 basis point rise is fully priced into the market, but the crucial thing is whether the euro zone recovery will be sufficient for Trichet to signal we are in a series of rate rises," said Kamal Sharma, currency strategist at Bank of America.

The ECB last raised interest rates in December. Euro zone interest rate futures are pricing in the region's borrowing costs at three percent by the end of this year

By 1100 GMT, the euro was up slightly on the day at $1.1931 <EUR=>, having hit a three-week high of $1.1974 on Wednesday.

It drew support on Wednesday after a survey showing the euro zone's manufacturing sector grew at its fastest pace in 19 months.

Data on Thursday continued to support the euro. Euro zone producer prices rose an above-expected 1.2 percent in January, German retail sales rose by a far stronger-than-expected 2.7 percent and German engineering orders surged 25 percent in January.

The euro was trading at 1.5643 Swiss francs <EURCHF=>, close to its best levels since April 2004 at 1.5678 hit earlier this week. RBS analysts said growing risk appetite and low Swiss rates were helping the euro against the franc.

The dollar was steady at 116.23 yen <JPY=>, off a one-month low of 115.43 set on Wednesday. Continued ...

© Reuters 2006. All Rights Reserved.

India stocks just made a new high!!!

AP
Tokyo Shares Drop, India Hits Record High

Thursday March 2, 6:50 am ET

In Asian Markets, Tokyo Shares Drop While India Hits Record High on Nuclear Pact With U.S.

HONG KONG (AP) -- Asian stock markets closed mixed Thursday, with Tokyo shares falling for a second straight session on losses by steel and machinery stocks, while smaller markets were boosted by gains on Wall Street.


Indian shares rose to a new record high for the second straight session as investors snapped up blue chips on news that U.S. President George W. Bush and Indian Prime Minister Manmohan Singh reached a landmark nuclear pact.

The Bombay Stock Exchange's 30-stock Sensitive Index, or Sensex, rose 61.31 points, or 0.6 percent, to a record closing high of 10,626.78. The Sensex's previous record was at 10,565.47 Wednesday.

In Tokyo, Nikkei 225 index dropped 54.70 points, or 0.3 percent, to 15,909.76.

Japanese stocks moved higher for much of Thursday's session before investors sold steel and mac

hinery stocks after steelmakers offered revised earnings outlooks. Nippon Steel, Japan's largest steelmaker, revised its earnings outlook upward, but its stock still fell 4.4 percent after traders said the revisions didn't offer any positive surprises.

No. 2 steelmaker JFE Holdings Inc., which left its net profit outlook unchanged and lowered its operating profit outlook, dropped 3.98 percent.

But auto stocks advanced on news of healthy auto sales in the United states. Gainers included Honda Motor Co. and Toyota Motor Corp.

Investors were cautious ahead of Friday's release of consumer price figures, analysts said. Signs that Japan is emerging from deflation, or falling prices, could spur the Bank of Japan to tighten its ultra-loose monetary policy in the near future.

Hong Kong shares rebounded slightly on gains by select mainland Chinese plays and property stocks.

The Hang Seng Index climbed 64.36 points, or 0.4 percent, to end at 15,882.45. The Hang Seng plunged 100.39 points, or 0.6 percent, on Wednesday.

In currency trading, the U.S. dollar edged a tad higher against the Japanese yen. It bought 116.06 yen in late Tokyo trading, up 0.01 yen from late Wednesday in New York.

The euro rose to US$1.1936 from US$1.1915 in New York.

Elsewhere:

BANGKOK: Thai shares advanced, led by foreign buying of energy and bank blue chips. The Stock Exchange of Thailand index gained 4.24 points, or 0.6 percent, at 752.52.

JAKARTA: Indonesian shares moved up, led by gains in bank and mining sector stocks. The Composite Index added 10.408 points, or 0.8 percent, to 1,249.678.

KUALA LUMPUR: Malaysian shares declined, hurt by a big drop in power utility Tenaga Nasional. The weighted Composite Index of 100 blue chips fell 1.78 points, or 0.2 percent, to 919.78.

MANILA: Philippines stocks rose marginally for the fourth day in a row, boosted by a stronger currency and calmer political situation. The 30-company Philippine Stock Exchange Index edged up 2.34 points, or 0.1 percent, to 2,137.61.

SEOUL: South Korean shares dropped on losses in most financial stocks. The Korea Composite Stock Price Index, or Kospi, edged down 3.89 points, or 0.3 percent, to 1,367.70.

SHANGHAI: Chinese shares fell, led by blue chips, as insurance companies withdrew funds from the market to lock previous gains. The Shanghai Composite Index shed 20.92 points, or 1.6 percent, to 1,285.67.

SINGAPORE: Share prices retreated slightly as investors sold stocks to lock in profits. The Straits Times Index shed 2.37 points, or 0.1 percent, to 2,480.30.

SYDNEY: Australian stocks rose, buoyed by a strong lead from Wall Street and positive commodity prices. The S&P/ASX200 gained 53.20 points, or 1.1 percent, to close at 4,903.80.

TAIPEI: Taiwan's shares were boosted by rising chipmakers following gains on Wall Street. The Weighted Price Index gained 29.57 points, or 0.5 percent, to 6,642.96.

WELLINGTON: New Zealand shares climbed, helped by gains in overseas markets. The NZSX-50 index gained 10.23 points, or 0.3 percent, at 3,407.33.

CURRENCIES

Euro at three-week high vs. dollar


ECB hikes rate to 2.5%, says risks remain on upside

By Wanfeng Zhou, MarketWatch

Last Update: 11:51 AM ET Mar 2, 2006

NEW YORK (MarketWatch) - The euro rose to a three-week high against the dollar Thursday after Jean-Claude Trichet, the European Central Bank president, made hawkish comments on the interest rate outlook in the eurozone.

The euro passed the $1.20 mark for the first time since Feb. 10. The currency had climbed to an intra-day high of $1.2002, before paring gains to trade at $1.1981, up 0.5%.

The euro also strengthened to 139.08 yen, up 0.6%.

"The rate hike was widely expected, so it's been discounted," said Mike Malpede, senior currency analyst at Refco in Chicago.

However, the statement from Trichet "seemed to be hawkish, leaving the door open for more rate hikes...Trichet specifically said the policy is accommodative," he said. "This should be a little bit supportive for the euro."
Earlier, the ECB hiked its key interest rate by a quarter point to 2.5%, in response to a European economy that's slowly showing signs of a pick-up in demand after a moribund 2005.

It's the second rate rise in four months, as the central bank moves to quell inflation.

Trichet, in a prepared statement after the policy meeting, said that monetary policy remains accommodative and the risks to stability remain on the upside. The banker also lifted his view of economic growth prospects.
"This decision reflects the upside risks to price stability that we have identified on the basis of both our economic and monetary analyses," said Trichet.

Trichet dropped his use of the word "vigilance" to describe the central bank's attitude toward inflation, reverting back to "monitoring closely." He did the same after the bank's December rate hike.

He added -- as he has done before -- that the central bank has not decided to engage in a series of rate hikes.

The ECB said that inflation is expected to be between 1.9% and 2.5% in 2006, and between 1.6% and 2.8% in 2007. Inflation risks include increases in oil prices.

It also upped its view on the economy, now seeing average annual real GDP growth in a range of 1.7% to 2.5% in 2006, and 1.5% to 2.5% in 2007. See full story.

Jeremy Friesen, senior currency strategist at RBC Capital Markets, said the market is expecting the ECB to raise rates at least twice more this year, but it will be "data dependent." Growth in Germany, inflationary pressures, oil prices will be closely monitored, he said.

Malpede said the dollar/euro's range trading will continue.

"The yield differential is going to limit any real upside for the euro right now," he said.

In the U.S. the market remains primed for one more, and likely two more quarter-point Fed target rate increases, which will lift rates to 5% by mid-year.

Earlier, the dollar showed little reaction to a marginally higher-than-expected U.S. jobless claims report.

The U.S. Labor Department reported that jobless claims rose 15,000 to 294,000 in the latest week; economists surveyed by MarketWatch had expected a smaller increase to 287,0000.
Also on Thursday, data showed that German retail sales surged 2.7% in January after declining 0.7% in December.

The report reinforced the sentiment that the economic rebound in the eurozone is gaining momentum, analysts said.

In Japan, markets were focused on Friday's consumer price index release, which will be key in shaping expectations for either a March or April BoJ policy shift, analysts said.

Wanfeng Zhou is a markets reporter in New York.

ECB Raises Interest Rates on Higher Growth Forecasts (Update2)

March 2 (Bloomberg) -- The European Central Bank raised its benchmark interest rate for the second time in three months and indicated that more increases are possible as economic growth and inflation accelerate. Stocks and bonds fell and the euro rose.

``We stand ready to do whatever is necessary and appropriate to ensure price stability,'' ECB President Jean- Claude Trichet said at a press conference in Frankfurt after the ECB lifted the refinancing rate to 2.5 percent from 2.25 percent. The ECB has ```a stimulative monetary policy. There is no doubt in my mind.''

The bank said the economy of the dozen nations sharing the euro will expand about 2.1 percent this year, up from a December forecast of 1.9 percent. Export earnings are fueling domestic spending by companies such as LVMH Moet Hennessy Louis Vuitton SA, which today said second-half profit rose 22 percent.

Trichet's comments ``imply that the ECB is thinking of further monetary tightening during the course of the year,'' said Julian Callow, chief European economist at Barclays Capital in London. ``I would look for that to happen on June 8.''

The Dow Jones Stoxx 600 Index fell 0.8 percent to 328.05 at 4:35 p.m. in London. The decline in bonds sent the yield on German two-year notes, among the most sensitive to changes in rate expectations, up 0.06 percentage point to 3.06 percent, the highest since Dec. 6, 2002. The euro climbed as high as $1.2016 from $1.1924 yesterday.

Faster Inflation

Confidence among European executives and consumers rose to the highest in five years in February. Inflation may average 2.2 percent this year and next, up from a previous estimate of about 2.1 percent, and 2 percent in 2007, Trichet said today.

Investors increased bets the ECB will raise the benchmark refinancing rate to 3 percent by the end of 2006, futures trading suggests. The yield on the three-month contract for December settlement was 3.27 percent, compared with 3.22 percent yesterday.

The contracts settle to the three-month euro area inter- bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

``Interest rates across the maturity spectrum remain at very low levels in both nominal and real terms, and our monetary policy remains accommodative,'' Trichet said. ``We will continue to monitor closely all developments with respect to risk to price stability.''

Wage Demands

In the past month, ECB council members Trichet, Yves Mersch, Nicholas Garganas and Axel Weber expressed concern about so-called second-round effects, as higher oil prices fan demands for higher pay, creating an inflationary spiral. IG Metall, the German engineering and metalworkers' union that traditionally sets the benchmark for other industries, demanded a 5 percent pay increase, more than twice the inflation rate.

Politicians and some economists see a risk that higher ECB rates will choke growth. Dario Perkins, an economist at ABN Amro Holding NV in London, said Feb. 24 that the ECB has irrational fears of an ``inflation monster'' and that the bank is being ``too aggressive.''

Pervenche Beres, chairwoman of the European Parliament's economic and monetary committee, today asked: ``Mr. Trichet, by raising interest rates today, doesn't the ECB risk halting the fragile upturn in growth?''

Global Rates

Manufacturing expansion accelerated to the fastest pace in 19 months in February, according to an index compiled by NTC Research Ltd. The euro-region unemployment rate declined to 8.3 percent, from 8.9 percent in September 2004.

With the exception of the U.K., where policy makers pared their benchmark lending rate in August to 4.5 percent and have left it unchanged since, central bankers worldwide are in the process of lifting borrowing costs.

Bank of Japan Governor Toshihiko Fukui has embarked on a campaign to prepare markets for higher rates as the world's second-largest economy emerges from seven years of deflation. The U.S. Federal Reserve increased interest rates 14 consecutive times since June 2004 to a four-year high of 4.5 percent.

The Fed will increase borrowing costs by at least as much as the ECB in 2006, according to a Royal Bank of Scotland Group Plc survey published yesterday in London.

The euro area will trail the U.S. in economic growth for a sixth year in 2007, according to Organization for Economic Cooperation and Development projections published Nov. 29. The U.S. unemployment rate is almost half that of Europe, and concern about job losses has made Europeans reluctant to increase spending. Retail sales in the region fell in January, the Bloomberg purchasing managers index showed Feb. 6.

Inflation Concerns

Higher energy costs are also forcing consumers to spend more on fuel. Crude oil prices have risen 84 percent in the past two years, climbing as high as $70.85 a barrel on Aug. 30. A barrel of crude cost $62.55 in New York trading today.

``As regards the future, we will decide to move on the basis of facts, figures, data, on our future assessment of the risks to price stability and their own evolution,'' Trichet said today. European consumers ``are not fully satisfied with the current level of inflation and they are calling to us to be up to our responsibility.''

Growth in M3, a measure of money supply the ECB uses as a barometer of future inflation, accelerated to 7.6 percent in January from a year earlier, up from a 7.3 percent gain in December, the bank said this week.

The ECB has estimated euro-region home values exceed the historical average by as much as 25 percent. The expansion in M3 has topped 4.5 percent, the level the ECB says is non- inflationary, every month since May 2001.

To contact the reporter on this story:
Brian Swint in Frankfurt at bswint@bloomberg.net.

Fukui, Emulating Greenspan, Prepares for Rate Rise (Update1)

March 3 (Bloomberg) -- Bank of Japan Governor Toshihiko Fukui, preparing to end a five-year deflation-fighting policy and raise interest rates, is taking a page from Alan Greenspan's playbook.

Fukui has embarked on a public campaign to prepare the markets for a change in policy in the world's second-largest economy. Analysts say the effort is reminiscent of former Fed Chairman Greenspan's management of market expectations through the use of such terms as ``measured pace'' at the outset of the U.S. central bank's current round of tightening in 2004.

The goal is to avoid the Fed's experience of 1994, when a series of increases that added 3 percentage points to the Fed's benchmark rate led to a bond-market slump as the cost of debt surged, said Jesper Koll, chief economist for Japan at Merrill Lynch & Co.

``The latest series of increases has been much better managed than 10 years earlier'' in the U.S., said Koll. ``A key challenge for the Bank of Japan will be to manage investor perceptions just as well.''

Japan, like the U.S. in both 1994 and 2004, is seeking to emerge from a period of negative real rates. Fukui, 70, doesn't want a repeat of the last time the Bank of Japan raised its target for the overnight call rate, to 0.25 percent from almost zero, in August 2000. The bank was forced to lower rates again seven months later as the global economy slumped after the Internet bubble burst.

No Repeat

``We will never let the BOJ repeat the mistake the bank made in August 2000,'' Kozo Yamamoto, a legislator of the ruling Liberal Democratic Party, said in January.

Under Fukui's plan, the Bank of Japan won't raise interest rates from zero right away. Instead, it has said it will first gradually reduce the amount of money it makes available as reserves to banks, now between 30 trillion yen ($258 billion) and 35 trillion yen.

The key criterion for a shift in policy is an end to more than seven years of deflation: The bank has said core consumer prices must rise for at least a few months and policy makers must be certain they won't resume their slide.

Core prices, which exclude fresh food, rose in November and December, the first back-to-back gains since April 1998. A government report today will probably show they rose again in January, gaining 0.4 percent from a year earlier, according to the median forecast in a Bloomberg News survey of economists.

On Feb. 9, Fukui told reporters that core prices ``are going to show clear gains in January and afterwards.'' Two weeks later, Fukui told lawmakers that ``We expect gains in core consumer prices will become clearer from now.'' He added: ``Conditions to shift our policy are being met gradually.''

Rising Yields

Japan's five-year notes fell after the Feb. 24 remarks, pushing yields to the highest since November 2000. The yield on 10-year notes rose to 1.595 percent, bringing their advance for the year to 15 basis points. The 10-year yield yesterday touched 1.64 percent, the highest since Sept. 8, 2004.

``Governor Fukui and other Bank of Japan senior officials have strengthened their tone recently and show no signs of letting up,'' Takehiro Sato, an economist at Morgan Stanley Japan, wrote in a note to clients on Feb. 24.

Sato reckons there's a 60 percent chance of a policy shift at the central bank's April 11 meeting and a 30 percent chance at its March meeting.

Eighty-two percent of respondents in a Merrill Lynch survey of 45 global investors published Feb. 21 said the Bank of Japan has done an excellent job communicating policy since March 2003, when Fukui took office.

Expansion

Japan's economy, which endured three recessions in 15 years, grew at a 5.5 percent annual rate last quarter, outpacing the U.S. and the European Union. Japan has now gone 48 months without a recession, appearing to fulfill another one of the central bank's conditions for a change in policy.

``The economy is recovering,'' the government said Feb. 22, deleting the word ```gradually'' from its monthly economic assessment. ``The recovery is expected to continue.''

The government estimates that a 1 percentage point gain in 10-year bond yields would add 1.5 trillion yen to the cost of servicing its debt, the world's largest at 151 percent of gross domestic product. For companies, the cost would be 2.9 trillion yen in lost profit, the government estimates.

``A sharp rise in yields raises interest rates across all forms of debt,'' said Stefan Worrall, an economist at Credit Suisse First Boston in Tokyo. ``The last thing the Bank of Japan wants to do is to surprise the market.''

To contact the reporter on this story:
David Tweed in Tokyo at dtweed@bloomberg.net

Japan's Inflation Rate Quickens, Aiding Policy Change (Update7)

March 3 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in eight years in January, giving the central bank room to end its deflation-fighting policy as soon as next week.

Core prices, which exclude fresh food, climbed 0.5 percent from a year earlier after 0.1 percent gains in the previous two months, the statistics bureau said today. The yen fell, eroding gains this week, on concern policy changes won't come fast enough to close the interest-rate gap with the U.S. and Europe.

The inflation report may persuade the Bank of Japan to reduce the cash it pumps into the economy at its next policy meeting on March 9, a precursor to lifting interest rates from near zero. Prime Minister Junichiro Koizumi said in Tokyo he's starting to see signs of an end to deflation, which discouraged bank lending and investment in the world's second-largest economy for the past seven years.

``The chance for a policy change next week has now risen to close to 100 percent,'' said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC Co. The focus will move to when the bank will start to raise borrowing costs, he said.

The yen dropped to 116.47 against the dollar at 4:13 p.m. in Tokyo, from 115.85 before the report was published. Accelerating inflation will erode the value of holding yen until interest rates in Japan rise. The Federal Reserve on Jan. 31 raised the main U.S. interest rate to 4.5 percent and suggested a run of increases isn't finished.

Japan's Finance Minister Sadakazu Tanigaki said he can't conclude that deflation has ended.

``We need to continue to cooperate with the Bank of Japan by constantly keeping in contact with each other and ensuring that there isn't a relapse,'' Tanigaki told reporters in Tokyo after the inflation report.

Wage Growth

A separate report today showed wages in Japan rose for a fifth month in January, the longest expansion since 1997. Spending by households fell 1.5 percent from December and the jobless rate rose to 4.5 percent from 4.4 percent.

Japan's government, the world's largest public debtor, has urged the central bank to avoid making abrupt changes to its policy to prevent a surge in bond yields that would increase interest payments and stifle economic growth.

The yield on the 1.6 percent bond due in March 2016 auctioned yesterday was unchanged at 1.655 percent.

The central bank's first policy adjustment would be to cut the amount of cash it provides to lenders, from between 30 trillion yen ($258 billion) and 35 trillion yen now, Governor Toshihiko Fukui has said. The bank won't immediately raise rates after reducing funds in the banking system, he said.

Policy Conditions

The Bank of Japan has vowed not to change its five-year-old policy until core prices stop falling for at least a few months and policy makers are sure they won't resume sliding. It also needs to be confident about the overall strength of the economy.

``The Bank of Japan's preconditions'' for changing its policy have been met, said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. Maguire predicts policy makers will cut the amount of cash pumped into the economy by about 5 trillion yen at next week's meeting.

Core prices in Tokyo, home to one in 10 Japanese, rose 0.2 percent in February, which show prices a month later than the national report, the first back-to-back gain since August 1998.

Excluding energy and food, Japan's nationwide consumer prices rose 0.1 percent in January, the statistics bureau said. This gauge of prices is widely used in the U.S. and Europe to measure inflation.

The core consumer price gain exceeded the 0.4 percent median forecast of 33 economists surveyed by Bloomberg News. Core price gains accelerated in January mainly because the effects of a cut in phone charges from January 2005 eased, and because gains in crude oil prices lifted the costs of gasoline, kerosene and other fuel products, the statistics bureau said today.

Economic Growth

Japan's economy will probably grow for a seventh straight year in 2006 and at its fastest pace since 1991, a survey of 16 economists showed.

``Japan's core consumer prices will continue to be pushed up by similar factors in February and March, and their increases are not likely to slow from April onwards,'' because the economy will keep expanding, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

The central bank's policy makers will meet again on April 10-11 and April 28.

To contact the reporter on this story:
Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

EU Forecasts Fastest Euro Region Growth Since 2000 (Update2)

March 3 (Bloomberg) -- The economy of the dozen euro nations will grow at the fastest pace since 2000 in the first three quarters of this year, the European Commission said.

Gross domestic product compared with the previous three month period will expand around 0.7 percent in the first, second and third quarters of this year, said the commission today. Growth hasn't exceeded 0.7 percent for three consecutive quarters since the period through June 2000.

Accelerating growth prompted the European Central Bank to raise interest rates yesterday and suggest more increases may follow. Exports are spurring business and consumer spending as earnings climb at companies such as Volkswagen AG. Services grew at the fastest pace in more than five years last month, a separate report showed today.

``The economy is gaining a lot of momentum,'' said Dirk Schumacher, an economist at Goldman Sachs Group Inc., which today raised its forecast for rates this year to 3 percent from 2.5 percent. ``That has clear implications for monetary policy. The ECB sounded relatively hawkish yesterday.''

The ECB yesterday raised its forecasts for growth and inflation. The economy of the euro countries will expand 2.1 percent this year, the bank said. Its previous forecast was for expansion of 1.9 percent.

Ready to Act

``We stand ready to do whatever is necessary and appropriate to ensure price stability,'' ECB President Jean- Claude Trichet said yesterday after the bank lifted the refinancing rate to 2.5 percent from 2.25 percent.

Bonds fell, sending yields to the highest since 2002. The yield on Germany's benchmark two-year government bond climbed to the highest since December 2002, touching 3.09 percent today, up from 2.88 percent two weeks ago. The Dow Jones Stoxx 600 Index rose 0.4 percent to 3476.17, putting its gain for the year at 6.4 percent.

The Brussels-based commission raised its forecast for the first quarter and now expects the economy to expand between 0.4 percent and 0.9 percent in the period, the same range it projects for the following two quarters. The higher end of its range was previously at 0.8 percent. The commission also published its third-quarter forecast for the first time.

Confidence Gains

Confidence among European executives and consumers increased to the highest in almost five years in February, the European Commission said Feb. 28. German unemployment declined last month and French consumers were the most optimistic in almost a year.

LVMH Moet Hennessy Louis Vuitton SA, the world's largest luxury-goods maker, posted a 22 percent profit gain in the second half as European and Asian shoppers bought more Vuitton handbags and clothes.

The euro area economy expanded 0.3 percent in the fourth quarter from the previous three months, the EU's Luxembourg- based statistics agency said today, confirming an estimate published Feb. 14. The economy grew 1.7 percent from a year earlier.

Consumer spending fell 0.2 percent in the quarter and increased 0.8 percent from a year earlier, the report said.

Business investment expanded 0.8 percent in the quarter and 3.2 percent from a year earlier, the statistics agency said today. Manufacturing in the euro area expanded in February at the fastest pace in 19 months, according to a survey of purchasing managers published March 1 by NTC Research.

Volkswagen, Europe's biggest carmaker, said its commercial- vehicle division returned to profit in 2005 and forecast further earnings growth this year as new models boosted sales and production and labor costs declined.

Services Index

Services in the euro area expanded the most since September 2000 in February. An index based on a survey of 2,000 purchasing managers at companies including banks and airlines rose to 58.2 from 57 in January, Reuters reported, citing a report by NTC Research Plc. for Royal Bank of Scotland Group Plc. A reading above 50 indicates growth.

Concern about inflation, and the improvement in the euro area economy, spurred the ECB to raise its benchmark interest rate for the second time in three months yesterday. The inflation rate may average 2.2 percent this year and next, up from a previous estimate of about 2.1 percent and 2 percent, the ECB said today.

The ECB's goal is to keep the annual inflation rate below 2 percent.

Rate Expectations

Investors increased bets the ECB will raise its main lending rate to as high as 3 percent this year to keep a lid on inflation, futures trading shows. The implied rate on the three- month contracts for December settlement rose to 3.29 percent from 3.27 percent yesterday.

ECB council members including Trichet and Nicholas Garganas have in the past month expressed concern that recent rises in the cost of oil might filter through to other parts of the economy and spur demands for higher wages.

The price of a barrel of oil has risen 18 percent over the past year, cutting profit at companies that use a lot of energy. Austrian Airlines Group, owner of the country's largest carrier, said Feb. 28 it posted a 65.6 million-euro fourth-quarter loss as the company spent more on jet fuel.

Another potential threat to growth in the euro area may be a slowdown in growth in the U.S. Declining home sales and a manufacturing slowdown indicate growth in the world's biggest economy may cool after accelerating early this year.

Euro-region export growth cooled in the fourth quarter, Eurostat said, declining to 0.5 percent from 3.4 percent in the previous three-month period.

``The risks the ECB has tended to flag lately have focused on the external environment,'' said Nick Matthews, an economist at Barclays Capital in London.

To contact the reporter on this story: John Fraher in Berlin at jfraher@bloomberg.net.

Last Updated: March 3, 2006 06:17 EST

European Two-Year Bond Yields Reach Highest Since 2002 on Rates

March 3 (Bloomberg) -- European two-year bonds fell, pushing yields to their highest since December 2002, on rising speculation the European Central Bank will raise interest rates at least two more times this year.

Short-term bonds, among the most sensitive to changes in monetary policy, are headed for the biggest two-week decline since November after the ECB yesterday raised interest rates for a second time in three months and President Jean-Claude Trichet said the central bank is ``ready to do whatever is necessary.''

Trichet ``gave the impression they may go further than the market had been pricing in,'' said Bernard Walschots, head of research at Rabobank Groep in Utrecht, the Netherlands. ``Two- year bonds are going to sell off more during the year.''

Germany's benchmark two-year government bond yielded 3.08 percent by 11:23 a.m. in London, up from 2.88 percent two weeks ago. The yield touched 3.09 percent today, the highest since Dec. 5, 2002, and may reach 3.68 percent by year-end, Walschots said.

The price of the 2.75 percent bond due December 2007 has fallen 0.34, or 3.4 euros per 1,000-euro ($1,200) face amount, to 99.43 in the past two weeks. Bond yields move inversely to prices. Ten-year bund yields rose 12 basis points, or 0.12 percentage point to 3.57 percent.

Services Growth

A private survey today showed growth in service industries, which makes up a third of the region's $9 trillion economy, accelerated last month. The purchasing managers' index rose to 58.2 from 57 in January, the report by NTC Research Plc for Royal Bank of Scotland Group Plc showed.

``All the economic indicators are helping to confirm that further rate increases are on the table,'' said John Davies, a fixed-income strategist at WestLB AG in London.

The economy of the 12 euro nations will grow at the fastest pace since 2000 in the first three quarters of the year, the European Commission said today. Gross domestic product compared with the previous three month period will expand around 0.7 percent in the first, second and third quarters of 2006, it said.

Manufacturing expanded at the fastest pace in 19 months in the euro region last month, according to a similar survey of purchasing managers by NTC Research Ltd. for Royal Bank of Scotland Group Plc published March 1.

ECB policy makers boosted their benchmark rate yesterday for the second time in three months, raising it by a quarter point to 2.5 percent, after inflation in the region stayed above the bank's ceiling for 13 months. The ECB aims to keep inflation below 2 percent. Consumer prices rose 2.4 percent in January, a European Union report showed on Feb. 28.

The ``adjustment of interest rates will continue to ensure that medium to long-term inflation expectations remain solidly anchored,'' Trichet said at a press conference yesterday in Frankfurt after the decision. ``Upside risks to price stability prevail.''

Narrowing Spread

Further interest-rate increases from the ECB should help contain inflation, which may help boost 10-year European bonds, which are more sensitive to price increases, according to Andrew Bosomworth, a fund manager at Pacific Investment Management Co., which manages the world's biggest bond fund.

``The ECB would probably like to see rates around 3 percent by the end of the year,'' said Munich-based Bosomworth. ``In the European market, it's better to be on the long end.''

The difference in yield, or the spread, between 10-year European bonds and shorter-dated euro region debt has narrowed in the last month, from 53 basis points on Feb. 3, to 48 basis points today.

The economy of the dozen nations using the euro may expand about 2.1 percent this year, up from a Dec. 1 forecast of about 1.9 percent, Trichet said at the briefing. Inflation may average 2.2 percent, rising from an earlier estimate of about 2.1 percent.

Rate Expectations

Traders have raised bets that borrowing costs will increase to 3 percent this year, futures trading shows. The yield on euro three-month interest-rate futures due in December and traded electronically on the London International Financial Futures Exchange, has risen 9 basis points this week to 3.27 percent.

The contracts settle to the three-month euro interbank offered rate, which has averaged 0.16 percentage point over the ECB rate since the euro's start in 1999.

Speculation borrowing costs in the region will rise further has hurt benchmark debt, with European bonds of all maturities losing investors 1.1 percent, including reinvested interest, since the year began, according to Merrill Lynch & Co. data.

Debt maturing in one to three years sold by European governments handed investors a 2.06 percent return in 2005, the worst performance since 1999, Merrill data shows.

The yield on the benchmark French 10-year bond rose 9 basis points this week to 3.58 percent, and the yield on the similar- maturity Italian bond also rose 9 basis points to 3.79 percent.

European Services Expand Most in More Than Five Years (Update2)

March 3 (Bloomberg) -- European service companies including banks and airlines expanded the most in more than five years in February as export-led growth spread through the economy.

An index based on a survey of 2,000 purchasing managers at service companies in the 12 nations sharing the euro rose to 58.2, the highest since September 2000, from 57 in January, a report by NTC Research Plc. for Royal Bank of Scotland Group Plc showed. A reading above 50 indicates growth.

``The figures confirm the general domestic upswing in the euro economy,'' said Wolfgang Leim, an economist at Dresdner Bank in Frankfurt. ``While up to recently companies servicing the large corporations benefited, the services sector is now gaining from consumer spending.''

Evidence of accelerating economic growth prompted the European Central Bank yesterday to raise its benchmark interest rate for the second time in three months and to revise higher forecasts for gross domestic product and inflation.

Service industries account for one-third of the region's $9 trillion economy. Air France-KLM Group, Europe's largest airline, said Feb. 16 that third-quarter profit more than tripled. Commerzbank, Germany's third-largest publicly traded bank, said Feb. 15 it's seeking acquisitions.

Economists expected today's release to show an increase to 57.3, according to the median of 32 estimates in a Bloomberg News survey.

Rising Confidence

The euro economy will grow at the fastest pace since 2000 in the first three quarters of this year, the European Commission said today. Gross domestic product compared with the previous three month period will expand around 0.7 percent in the first, second and third quarters of this year, said the commission. Growth hasn't exceeded 0.7 percent for three consecutive quarters since the period through June 2000.

Expansion is still being driven by exports after the euro's 13 percent decline against the dollar last year made European goods more competitive. As companies plow profits back into new equipment, the domestic economy is showing signs of picking up. Confidence among executives and consumers rose to the highest in almost five years last month, the commission said this week.

``The signals for a recovery are multiplying,'' said Luigi Speranza, an economist at BNP Paribas SA in London. ``It's extended from manufacturing to services, which is more linked to internal demand, so the signs are now across the board.''

Growth Gap

The ECB, which aims to keep inflation just below 2 percent, says accelerating growth increases the risk of price increases staying above that target. The bank yesterday increased the benchmark rate by a quarter point, to 2.5 percent, and said inflation will stay above its limit for an eighth year in 2007.

Lending to companies and consumers rose at the fastest pace in more than five years, the central bank said this week. The ECB also raised its forecast for economic growth this year to about 2.1 percent, from the 1.9 percent predicted in December.

That won't be enough to close the growth gap with the U.S. The Organization for Economic Cooperation and Development forecasts the U.S. economy will grow 3.5 percent this year.

While unemployment in the euro region is declining, at 8.3 percent the rate is still almost twice that in the U.S.

``Record business and consumer confidence indicators usually take six months to translate into job growth,'' said Karsten Junius, an economist at Deka Bank in Frankfurt.

Henning Kagermann, chief executive officer of Germany's SAP AG, said Feb. 7 that sales growth in Germany will trail Europe and the U.S. as domestic customers spend less. The world's largest maker of business-management software is trying to win small and medium-sized clients in Germany. Such companies make up the bulk of the economy.

Investors are betting the ECB will raise interest rates to 3 percent by the end of the year, futures trading suggests. The yield on the three-month contracts for December settlement was 3.28 percent today.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

To contact the reporter on this story:
Gabi Thesing in Frankfurt at gthesing@bloomberg.net

Last Updated: March 3, 2006 05:58 EST