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Aug 14 - 20, 2000

Japan ends 0% rate target

The Bank of Japan raised its leading short-term interest rate for the first time in a decade Friday, saying the economy has largely improved over the last year and a half. The independent panel rejected a last-ditch request by the government to delay its decision.

Japan's central bank lifted the short-term official discount rate target to 0.25 per cent, abandoning at least for now its so-called "zero interest rate policy."

While the target of zero per cent has been policy only since last year, the BoJ has been lowering rates over the last decade. The last time it raised the official discount rate was in August 1990 by 0.75 of a per centage point to 6 per cent.

Economists were divided about whether rates would rise. But the BoJ had been increasingly expected to hike rates amid a mounting call from central bank Governor Masaru Hayami to raise rates.

The rate hike comes against the will of the government of Prime Minister Yoshiro Mori, which has pushed for the BoJ to maintain the cheap money tack to cement Japan's economic recovery.

Hayami said a zero-rate policy papers over the need for structural reform, hurts pensioners and destroys the market's ability to assess risk.

Shortly after the announcement, Japan's Jiji news service quoted Mori as saying he believed the hike was too premature.

In the currency market, the dollar dipped slightly to 108.50 against the Japanese yen, compared to 108.85 in late U.S. trading Thursday.

One leading economist said the rate move isn't likely to have a deleterious effect on the world's second-largest economy and Asia's major economic engine.

"The idea of a rate hike has been on the table for a long time," said Sonia Gibbs, chief economist with Nomura International in London. "This will signal the economy is stronger, it's more of a psychological impact."

Korea rail to re-open 

Near the border with North Korea, rusting train tracks lined with sesame and red and green pepper shrubs disappear into a bank of earth. A sign reads in English: "We want to get back on track."

The last train to run this stretch of railway linking Seoul and Pyongyang passed by in 1945. That was the year American and Soviet forces divided the Korean peninsula at the close of World War II. Now the line, built by Japanese colonizers in the early 1900s, is poised to reopen as a symbol of reconciliation between communist North Korea and democratic South Korea.

It could also be a boon to fledgling inter-Korean trade, and allow South Korea to open a land route for exporting goods to its markets in China and Europe. At talks in Seoul a week ago, negotiators agreed to reconnect the 309-mile rail line that runs from Seoul, South Korea's capital, to Pyongyang, the North's capital, and on to Shinuiju on the North's border with China. On Thursday, a South Korean official said he hoped the railroad would be running by the fall of 2001.

"We hope to get to work right away and we can complete the work in a year," said Hwang Ha-soo, chief of the Exchanges and Cooperation Bureau of Seoul's Unification Ministry. The deal, one of several initiatives arising from the groundbreaking summit in June between leaders of the Koreas, delighted Chae Il-soon, a 68-year-old shopkeeper in Munsan, 28 miles north of Seoul. Chae hopes the reopening of the railway will let her visit a stop only 71/2 miles away - her abandoned hometown of Changdan, which lies on the border within the Demilitarized Zone that separates the two Koreas.

"If I get the chance to go back to my hometown, I would look for my father's grave," Chae said. It will be a long wait. South Korea prohibits its citizens from traveling to the North, and both governments are looking to the railroad at least initially as a means of ferrying cargo, not passengers. South Korea's transportation ministry estimates it will cost $45 million to restore its portion of disused line.

Europe looks for direction 

Europe's leading markets wavered near break even Friday morning, with financial stocks generally higher while top technology shares declined after a sharp drop for the sector on Wall Street a day earlier.

Frankfurt's Xetra Dax index was up 3.8 points, to 7,284.77. Insurer Munich Re (FMUV) led the way higher with an advance of 2.1 per cent.

London's FTSE 100 index trickled down 3.4 points to 6,383.9. Leading the loser board in London was chip designer ARM Holdings (ARM), which fell 4.9 per cent.

The CAC 40 in Paris lost 0.1 per cent to 6,556.36, with chip maker STMicroelectronics (PSTM) declining 1.8 per cent.

The FTSE Eurotop 300 index, slipped fractionally, with its telecom component down 0.8 per cent.

Technology stocks on Wall Street took a tumble Thursday, driving the Nasdaq composite down 2.4 per cent. The blue-chip Dow Jones industrial average rose slightly.

U.S. stocks were expected to open higher later Friday. S&P index futures trading on the Globex system were up 0.9 point at 1,475.20.

Tokyo up as BoJ looms

Asia's top markets ended mixed Friday, with Tokyo's leading index edging higher as investors considered the prospect of the first interest rate hike by the Bank of Japan in a decade.

Tokyo's benchmark Nikkei 225 index closed up 141.85 points, or 0.9 per cent, to 16,117.50.

The Hang Seng index in Hong Kong was down 0.7 per cent to 17,204.10, while the Singapore Straits Times rose 0.2 per cent, or 4 points, to 2,088.33.

In other leading Pacific Rim markets, Australia's S&P/ASX 200 index shed 0.2 per cent. The Taiwan Weighted index in Taipei fell 0.6 and the KOSPI index in Seoul declined 1 per cent.

Economy still slowing

The U.S. economy showed signs of slowing in June and July but labor markets were tight, forcing firms to raise pay and to find creative ways to entice workers, the Federal Reserve said Wednesday.

The U.S. central bank's latest Beige Book, a summary of coast-to-coast business conditions, reported that easing consumer demand for goods and services appeared to be restraining price increases. It noted that energy prices, which have soared in the last year, may have already hit their peak.

Companies seem to be absorbing the indirect costs of more expensive energy without passing them on to consumers "for the time being," the Fed said.

But the scarcity of workers seemed to be "limiting growth of activity in some areas," the Fed said, noting that many firms reported that wages were on the rise and some companies were using free meals and signing bonuses to lure employees.

The Beige Book findings will be used when the Fed's policymaking Federal Open Market Committee next meets on Aug. 22 to set U.S. interest rates. Analysts expect the Fed will leave rates unchanged.

Mergers & Acquisitions

FlextronicsJIT Holdings: Flextronics International extended its ongoing shopping spree Thursday, paying $640 million in stock for Singapore-based JIT Holdings Ltd. in a deal that significantly expands the company's Far East electronics manufacturing capabilities.

RalcorpAgribrands: Private label cookie and cereal maker Ralcorp Holdings Inc. said Tuesday it agreed to merge with animal feed maker Agribrands Inc., reuniting former pieces of Ralston Purina Co. in a deal marking further consolidation in the food industry.

NokiaDiscoveryCom: Finland's Nokia, the world's largest mobile phone maker, got a stronger footing in the market for fast Internet access services on Tuesday by buying U.S. technology firm DiscoveryCom for $220 million.

CinvenMcKechnie: British private equity firm Cinven said on Sunday it had reached an agreement to buy aerospace parts group McKechnie Plc for some £434 million ($653 million) in cash.

Phone.comSoftware.com: Phone.com and Software.com, two software companies that enable mobile phone users to access the Internet agreed Wednesday to merge in a $6.8 billion stock swap and recruited a top Cisco executive to lead the new entity.

FirstEnergy—GPU: FirstEnergy Corp. has agreed to buy GPU Inc. Tuesday for $4.5 billion in cash and stock, creating one of the largest electric companies in the United States.

Latest earnings roundup

Bayer: Bayer AG, posted a 31 per cent jump in operating profit for the first half of the year. Bayer, earned 2 billion euros ($1.8 billion) in the first six months of 2000, up from 1.5 billion euros in the year-earlier first half.

Cathay: Cathay Pacific Airways, said net profit surged to a record HK$2.183 billion ($280 million) in the six months ended June 30, from HK$108 million, in the first six months of 1999.

Ryanair: Ryanair Holdings PLC said Wednesday that first-quarter earnings climbed 31 per cent. The Irish carrier said net income rose to 20.4 million ($18.3 million), or 28.76 cents per share, from 15.5 million, or 23.06 cents per share, in the year-earlier period.

BP: BP Amoco PLC reported a 164 per cent jump in second-quarter earnings. The Anglo-American company said second-quarter adjusted replacement cost profit, rose to $3.67 billion from $1.37 billion in the year-earlier quarter

BA: British Airways PLC, reported a 65 per cent slide in pre-tax profits for its fiscal first quarter. The airline earned £8 million ($12.4 billion) in the quarter ended June 30, compared with a net profit of £23 million in the 1999 period.

Cisco: Cisco Systems reported fourth-quarter revenue and earnings that exceeded analyst expectations. Cisco reported earnings of $1.2 billion, or 16 cents per share, from $710 million, or 10 cents per share.

German jobless falls

German unemployment fell in July by a less-than-expected 9,000, the Federal Labor Office said Tuesday, as Europe's largest economy expands on rising demands for exports.

Economists had expected the seasonally adjusted figure to fall by 21,000. The unemployment rate, which is based on unadjusted data, rose to 9.3 per cent, compared with 9.1 per cent in June.

The euro has fallen 22 per cent against the U.S. dollar since its inception in 1999, making exports cheaper in international markets. That has encouraged manufacturers to employ more workers to meet demand.

Eastern Germany added 3,000 to unemployment rolls.

Output falls in Germany

German industrial output fell an unexpectedly large 3.5 per cent in June from the previous month, official data showed Monday, while industrial output in Britain was stronger than expected, up 0.1 per cent.

The decline in Germany's output was the biggest in more than five years.

Germany's Finance Ministry said the decline amounts to a one-time blip downward after a strong 2.8 per cent increase in May and three straight months of gains. Economists polled by Reuters expected a month-to-month decline of 0.4 per cent.

Separately, Britain's Office for National Statistics said Monday that industrial output rose to an annual rate of 2 per cent in June. Economists had expected the rate to decline to 1.8 per cent.

Manufacturing output, which excludes the volatile energy sector, ticked higher by 0.2 per cent on the month and 2.1 per cent on the year.

U.S. inventories jump

U.S. wholesale inventories increased for the 17th consecutive month in June, the Commerce Department said Wednesday, suggesting businesses expect consumer spending to remain strong.

Wholesale inventories rose 1.0 per cent in June to a seasonally adjusted $323.45 billion after gaining 1.0 per cent in the previous month. May's gain initially was reported as a rise of 0.8 per cent.

The inventories gain was much stronger than the 0.4 per cent increase forecast by economists in a Reuters poll.

The stock-to-sales ratioa measure of how long it would take to totally deplete inventories at the current sales pace — held steady at 1.29 months.

Bond prices soar

U.S. Treasury Bonds rose sharply Thursday, with the 10-year note's yield falling to its lowest level in one year, as a favorable refunding auction and positive technical factors lifted prices.

The dollar gained against the yen but fell against the euro.

The benchmark 10-year Treasury note rose 6/32 of a point in price to 99-28/32. The yield, which moves inversely to price, was at 5.77 per cent.

The 30-year bond rallied 25/32 to 108-5/32, its yield falling to 5.67 per cent from 5.73 per cent Wednesday.

Mortgage rates slip

U.S. mortgage rates continued their gradual slide for the third straight week, according to a report released by Freddie Mac.

A 30-year fixed rate mortgage (FRM) averaged 8.04 per cent for the week ending Aug, 11, down from 8.12 per cent a week earlier. The same mortgage was 8.15 per cent one year earlier.

The average for a fixed rate 15-year mortgage was 7.75 per cent this week, down from last week's average of 7.88 per cent the previous week. A year ago the rate was 7.70 per cent.

A one-year Treasury-indexed adjustable-rate mortgage (ARM) averaged 7.28 per cent, unchanged from last week. The same mortgage averaged 6.24 per cent one year earlier.

Brazil's GDP soars

Key indices in the Americas finished their sessions lower Wednesday as market gauges in Brazil and Mexico fell more than 2.0 per cent, and Toronto failed to keep up with Tuesday's impressive gains.

Pepsi Bottling COO named

Pepsi Bottling Group Inc. on Wednesday said it named John Cahill to the new post of president and chief operating officer and hired a senior PepsiCo Inc. executive to replace Cahill as executive vice president and chief financial officer.