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June 25 - July 01, 2001

BOJ downgrades economy

The Bank of Japan (BOJ) downgraded its assessment of the economy Monday because of a big drop in output, only days after its controversial decision not to ease its monetary policy further.

In its monthly report for June, the BOJ said the slowdown in Japan's economy is intensifying and is likely to continue in the near term. The report comes on the heels of the central bank's decision last Friday to keep monetary policy on hold despite data showing output shrank in the first three months of the year and a government report saying the economy is deteriorating.

"Looking at our economy, the adjustment phase is intensifying as output has fallen dramatically due mainly to a drop in exports," the BOJ report said.

In its previous two monthly reports, the central bank had merely described the economy as being in an adjustment phase; however, the latest downgrade still falls short of the blunt term "deteriorating" now being used by the government and which the BOJ itself used during the global financial crisis in 1998.

The Associated Press reported that the government's frankness is widely viewed as reflecting the policies of the new administration of Prime Minister Junichiro Koizumi, who has promised to rein in public spending while cracking down on banks' loose lending practices that have sent bad debts soaring for years.

The latest report pushed the yen to its lowest level in a month, around 123.50 yen against the dollar and around 106.60 yen against the euro in early Monday trading in Europe.

The BOJ downgrade is likely to fuel calls for a further monetary easing, perhaps at its next Policy Board meeting later this month, as data continue to paint a bleak picture of the economy.

Possible easing measures could include raising the BOJ's quantitative target of the volume of money — it now seeks to keep reserves parked with it at five trillion yen — or increasing its outright purchases of government bonds.

BoE warns interest rate cuts may stoke inflation

The Bank of England (BoE) has warned that further interest rate cuts could stoke inflation, reinforcing market expectations that UK rates will be on hold for a while and that the next move may be upwards.

Minutes released on Wednesday of the BoE's interest rate policy meeting earlier this month showed the nine-member Monetary Policy Committee (MPC) voted 8-1 in favour of leaving the benchmark repo rate at 5.25 per cent.

The only dissenter, arch-dove Sushil Wadhwani who has consistently argued for lower borrowing costs, voted for a quarter-point rate cut. But the general view on the committee at the June 5-6 meeting was that a further rate cut would worsen the imbalance between strong consumer demand and weak domestic output growth. Policy action to offset these effects would, however, tend further to stimulate consumption and so to worsen the imbalances. These could then prove more problematic for the control of inflation in the medium term. That was a key policy dilemma, the minutes said. Short sterling futures took an initial dive on the minutes, reflecting higher expectations of a rate rise before the end of the year, before recovering lost ground to remain unchanged. The pound and government bonds, known as gilts, were unaffected.

The MPC began cutting interest rates in February in response to a deteriorating world economic outlook and benign domestic inflation which has been below the government-set target of 2.5 per cent for over two years. So far, the MPC has made three quarter-point rate cuts. Economists had expected the MPC to make at least one further rate cut this year to stimulate business and consumer confidence. But a surprise surge in the underlying inflation rate in May, to 2.4 per cent from 2.0 per cent the previous month, combined with robust consumer demand figures, have led many to predict that the next rate move will be upwards.

ADB unveils LIBOR-based loan product

The Asian Development Bank (ADB) on Tuesday approved a loan product based on the London interbank offered rate (LIBOR) that it said would offer borrowers greater flexibility in the choice of currency and interest rate basis.

From July 1, Manila-based ADB will offer public and private borrowers a LIBOR-based loan that will carry a floating lending rate consisting of six-month LIBOR and a spread fixed over the life of the loan.

Japan warns of currency intervention

The Bank of Japan's latest warning on currency intervention betrays growing concern that Japan's deteriorating economy could put the yen under further pressure, analysts say.

Firing a shot across the bows of yen bears, Japan's central bank chief Masaru Hayami said on Tuesday that currency intervention may be needed if exchange rates moved too rapidly. He also warned that a weaker yen would be detrimental to the global economy.

The yen has fallen some five per cent against the euro and the dollar already this month on growing signs that Japan's economy is faltering. Although Japan is unlikely to be too concerned about the current level of the yen, given the export-boosting benefits of currency depreciation, the timing of the central bank's latest salvo suggests it is aware that more drastic currency moves could lie ahead.

ECB leaves rate on hold

The European Central Bank left its key interest rate on hold at 4.5 per cent on Thursday, despite data showing an economic slowdown was gathering pace.

Ten economists and fund managers polled by CNN expected the ECB to keep rates steady but all agreed that the bank, which controls interest rates for the 12-nation euro zone, would cut rates in July.

The ECB "surprised the market on May 10 with a 25 basis point rate cut. That came against expectations, but July seems to be a better opportunity for a cut as better inflation news comes through," Steve Barrow, Currency Economist at Bear Stearns, told CNN.

Euro zone inflation rose to an eight-year high of 3.4 per cent in May, above the ECB's target rate of 2 per cent. Economists say inflation has been driven up by higher energy and food prices and would be expected to decline in coming months, giving the central bank the opportunity to cut rates.

UK to be cautious on euro

Chancellor of the Exchequer Gordon Brown has moved to cool speculation that the British Government is preparing for swift adoption of the euro.

In his annual Mansion House address to City financiers and business leaders he pledged a "considered and cautious" approach to join the European monetary system, describing the government's stance as "pro euro realism."

Many observers had predicted that PM Tony Blair's Government would launch a campaign for euro entry immediately after its second election victory on June 7. The uncertainty had led to volatility in the value of the pound.

Brown said that assessment of the five economic tests he set out in 1997 had not yet started. Technical work would have to be done to enable the assessment to be made within two years, as Labour had promised before the election.

German growth target

The German government said for first time on Tuesday that it may be tough to meet its earlier expectation of 2 per cent economic growth for this year. Speaking to an oil industry meeting, Economy Minister Werner Mueller said: "Second-quarter growth might even be zero. If that is the case, then full-year growth of 2.0 per cent will be hard to attain."

The German economy is the biggest in the 12-country euro zone. Mueller said it was important however "not to talk down the economy." "There are many sectors, particularly the export-orientated ones, which are coming out with good numbers. What's more, without the extensive tax reforms, the situation would look a lot worse," Mueller argued.

Russia not to borrow from IMF

Russia announced Tuesday that its latest round of talks with International Monetary Fund chiefs has concluded that Moscow would probably not ask for new loans to help cover a huge debt burden that matures in 2003.

We discussed this question with IMF deputy managing director Stanley Fischer and came to the conclusion that this situation (a request for a loan) is unlikely, the PRIME-TASS news agency cited Finance Minister Alexei Kudrin as saying. However the report also cited Kudrin as saying that Russia would still turn to the IMF for help should the world's economy as a whole sour and make it impossible for Moscow to meet the payments.

UK plans to boost productivity

The newly re-elected Labour government plans to create a "true enterprise culture" in Britain through a drive against cartel price-fixing and by boosting productivity, Chancellor of the Exchequer Gordon Brown said on Monday.

The government has warned that under planned legislation, businessmen found colluding to keep prices high could face jail. "Today we bring forward radical measures to tackle our productivity gap and create in Britain a true enterprise culture where the chance to succeed is genuinely open to all," Brown said at his 11 Downing Street office.

Mergers & Acquisitions

Gallaher—Tabak: Gallaher, the UK's third biggest tobacco company, agreed on Friday to buy Austria Tabak for about $1.8 billion.

Lucent unit: Bids for the fiber optic unit of Lucent Technologies Inc. are coming in at $3 billion to $3.5 billion, lower than the anticipated $5 billion the business was expected to raise, press reports said Thursday.

Telekom: Deutsche Telekom said Thursday it has agreed to sell six German cable TV companies to U.S. cable network operator Liberty Media in a deal that could bring a reported $4.7 billion, or $400 million more than earlier projections.

GE—Honeywell: The European Commission confirmed Wednesday that it sent out a draft decision recommending that the European Union reject General Electric Co.'s proposed $41 billion purchase of Honeywell International Inc.

Nasdaq rises for 3rd day

Investors returned to technology, financial and retail shares Thursday, betting that lower interest rates can stem the declining corporate profits that have hammered stocks this year.

The Nasdaq composite index rose 27.44 points, or 1.4 per cent, to close at 2,058.68, while the Dow Jones industrial average added 68.10 to end the day at 10,715.43. The Standard & Poor's 500 index advanced 13.89 to 1,237.03.

On the New York Stock Exchange, advancing issues beat declining ones 1,743 to 1,356 as 1.4 billion shares changed hands. Nasdaq winners topped losers 2,053 to 1,670 as 2.1 billion shares traded.

In other markets, the dollar rose against the yen and was a little changed versus the euro. Treasury securities advanced.

Tokyo holds onto early gains; HK down

Tokyo stocks held onto early gains by midday on Friday, helped by tech strength and bank reform enthusiasm.

Technology stocks helped lift the benchmark Nikkei 225 average by 75.84 points or 0.59 per cent to 13,038.27. That extended Thursday's 2.27 per cent surge.

The broader TOPIX index added 0.75 per cent or 9.61 points to 1,298.10.

Elsewhere in the region, the Australian market also was firmer, with the S&P/ASX200 picking up 18.1 points or 0.5 per cent to 3428.9.

Abbott looks to drugs

Abbott Laboratories Inc. on Thursday said its recent $6.9 billion purchase of Knoll Pharmaceuticals would help make drugs the future focus of the firm, which in past years has been equally well known for its medical devices and diagnostics products.

Bonds rise in late trade

U.S. Treasurys shaved some gains at midday Thursday when a regional manufacturing index turned out not as weak as economists had expected and thus seemed to favor a quarter-percentage-point Federal Reserve rate cut next week instead of a half-percentage-point reduction. Benchmark 10-year notes were up 4/32 to 98-19/32, yielding 5.19 per cent, while 30-year bonds were up 13/32 to 96-8/32, yielding 5.64 per cent. Two-year notes were down 1/32 to 100-16/32, yielding 3.96 per cent. Five-year notes were up 1/32 to 99-25/32, yielding 4.67 per cent.

Mortgage rates inch lower

Mortgage rates inched lower for the third consecutive week as the pace of home building in the United States dipped in May.

The benchmark 30-year fixed-rate mortgage (FRM) averaged 7.11 per cent for the week ending June 22. The average this week for a 15-year fixed-rate mortgage was 6.65 per cent. One-year adjustable-rate mortgages (ARMs) averaged 5.74 per cent.

U.S. trade gap shrinks

The U.S. trade deficit fell in April, the government said Thursday, but the drop followed a record-setting gain in March and still was higher than forecasts by Wall Street economists.

The nation's trade deficit shrank to $32.2 billion in April from a revised $33.1 billion in March, the Commerce Department reported. Economists polled by Briefing.com had expected a deficit of $30.9 billion.

Separately, new jobless claims fell to 400,000 last week from a revised 434,000 the prior week, the Labor Department said, versus Wall Street forecasts for 425,000.

U.S. exports fell to $86.9 billion from $88.7 billion in March.

Exported goods fell to $62.1 billion from $63.9 billion in March, while exported services were little changed. Meanwhile, imports also fell, to $119.1 billion from $121.8 billion in March.

Europe sinks on Infineon

Europe's major bourses closed loweron Wednesday after German chipmaker Infineon Technologies issued a profit warning.

Frankfurt's electronically traded Xetra Dax fell 43.20 points, or 0.8 per cent, to 5,695.3. Communications firm Siemens (FSIE), which

owns 71 per cent of Infineon, fell 5.3 per cent. Its Epcos (FEPC) electronics components unit lost 4.3 per cent.

London's FTSE 100 ended up 0.26 per cent at 5,695.3, as telecom equipment maker Marconi (MONI) fell 6.7 per cent after U.S. rival Tellabs slashed its second-quarter outlook.

In Paris, the CAC 40 blue chip index shed 0.55 per cent to 5,170.8. Alcatel (PCGE), Europe's fourth-largest telecom equipment maker, lost 3.05 per cent, France Telecom (PFTE) slipped 1.9 per cent, and its mobile phone unit Orange (PORA) lost 1.38 per cent.

In Amsterdam, the AEX index fell 0.8 per cent and the SMI in Zurich was 0.7 per cent lower. The MIB30 in Milan dropped 0.9 per cent.

U.S. leading indicators up

A key gauge meant to predict the U.S. economy's performance rose in May, a report said Wednesday, hinting that the slowdown in the world's largest economy could nearly be over.

The Conference Board, a New York-based business research group, said its Index of Leading Indicators rose 0.5 per cent in May, its biggest gain since December 1999, after rising 0.1 per cent in April. Analysts surveyed by Briefing.com expected indicators to rise only 0.2 per cent.

Japan takes another trade hit

There is fresh evidence that one of the engines of Japan's economy — exports — is losing steam.

Japan's trade surplus with the rest of the world plunged 86.1 per cent in May from a year earlier.

Economists point to slowing demand in the United States, and competition from other Asian exporters, whose currencies are weaker.

Japan's trade surplus was the lowest since January 1996, a finance ministry official told Reuters.

It hit 80.1 billion yen ($652 million), down from 575.0 billion.

Japan's trade surplus has been slumping in recent years and the trade balance swung into a deficit in January for the first time in four years.

Falling exports in recent months have added to worries about Japan's fragile economy as it struggles to reverse a prolonged slump.

Recent data suggests the world's second-biggest economy is sinking into its fourth recession in a decade.

China slaps Japan on trade

China has announced that it will impose special duties on some of Japan's most popular exports.

The trade war threatens Asia's biggest trading relationship, worth almost half a trillion dollars last year.

China will impose tariffs on cars, mobile phones and air conditioners from Japan, the Ministry of Foreign Trade and Economic Cooperation in Beijing said late Monday.

The higher tariffs are a response to Japan's import restrictions on spring onions, shiitake mushrooms and the grass used to make tatami mats. Japan imposed higher taxes on those goods from China in April.

China has not yet released the amount of its tariffs. But they could crimp the most important Asian trade relationship.

JetBlue to buy 48 planes

JetBlue Airways, a U.S. low-fare carrier, said on Monday it has ordered up to 48 Airbus Industrie aircraft worth $2.5 billion.

Air show opens

The world's largest air show has opened with United Airlines' parent company, UAL Corp., saying it intends to buy 100 jets worth $2.5 billion from France's Dassault Aviation.