Asian Market Update

BOJ Joins the Fed in ZIRP-land with Surprise Cut, USD Consolidates Gains While JPY Recovers After BOJ Selloff

After an initial media gaffe that flip-flopped regarding the possibility of a Bank of Japan decision delay, Tokyo central bankers delivered a surprise 20bp cut, taking its overnight interest rates down to 0.10%. Vast majority of sources anticipated BOJ to remain at 0.30%, with only a handful of analysts calling for a cut to as low as 0.15%. However, deteriorating economic environment at home and abroad, as well as a full-court press by the administration officials, prompted a second rate cut in three months. Just prior to the decision, Japan's Economic Minister Yosano stated that any easing by the BOJ would send a message to the panicked markets, Finance Minister Nakagawa said the economic conditions were severe, while government spokesman Kawamura expressed hope for BOJ to take appropriate policy taking the economy and prices into account, and the central bankers uncharacteristically obliged. In their accompanying statement, BOJ cited the combined effects of declining export sector, weak domestic demand, poor prospects for corporate profits and rising unemployment as factors impacting today's decision. Moreover, the central bank noted the significance of monitoring for further downside risks in US, Europe, and the emerging nations in light of increased economic uncertainty that was seen as requiring quite some time to abate. Additionally, BOJ saw consumer inflation likely to be moderating further while also announcing temporary outright purchase of commercial paper and JGBs - all moves that mimicked in nature and scope the most recent moves by the Fed that promised buying of treasuries and agencies while establishing residence in ZIRP-land.

Nikkei225 traded under pressure for much of the session ahead of the decision, extending losses to -1.1% going into the break, recovering to as high as +0.7% after the rate cut, but subsequently selling down to -0.9% toward session close. Among the more widely traded shares, oil names Inpex and Nippon were down 6% and 4% respectively on yet another 4-year low put in by the selloff in crude. The latter also announced a 25% cut in refined production anticipated for the month of January. Elsewhere, Hitachi Construction fell over 3.5% after anticipating 900 job cuts on reduced demand while large memory chip maker Elpida was sharply higher following an unexpected rebound in DRAM chip prices. Pharma names Daiichi Sankyo and Ube were also higher after an experimental treatment for blood clots developed by Eli Lilly progressed toward the European drug commission for approval. In Tokyo fixed income, 10-year JGB yielded 1.225% from prior close of 1.272% and 2-year yielded 0.4% from prior 0.46% in the aftermath of the BOJ rate cut.

In Australia, S&P/ASX recovered from early session losses toward a 1% finish in spite of more heavy selling in commodity names. BHP traded down 3% and Rio fell 1.3% just ahead of market close. Fortescue Metals was among the more heavily sold names after reports of frozen company accounts that followed legal action relating to changes made by the company recently in relation to shipping contracts. Despite the gold drop however, Newcrest mining was up 6% after Capital Group Co's - largest US manager of stock and bond funds - bot a 5% stake in the company. Elsewhere, shares of Qantas Air rallied on prospects of pursuing a deal with regional carriers following failed merger talks with British Airways, and Virgin Blue, 2nd biggest Aussie airline, also gained on those news.

In after-hours US markets, the latest installment of the auto bailout saga saw Treasury Paulson reflect on the unnerving deliberation by the administration, stating that while the President has made it clear he was not in favor of an automaker failure, he found it difficult to present a rescue without a reorganization. Sources close to the decision process called for the impending outcome to be delivered as early as Friday, while unconfirmed reports also cited secured govt funding to get GM and Chrysler through the first quarter. Paulson also went on to say that Lehman failure was a symptom, rather than a cause, of the accelerated crisis, and that while additional measures were needed to help the homeowners, lower interest rates would open up the mortgage market toward a bottom in housing.

In currencies, Asian session saw technically constrained rangebound conditions across the dollar majors. EUR/USD oscillated between 1.42 and 1.43 in consolidation of the earlier dollar rally, USD/CHF traded between 1.0750 and 1.0835, and GBP/USD remained contained by 1.52. JPY bears got a boost after the surprise BOJ cut only to see the yen recover its initial losses. After the initial knee-jerk yen selling, USD/JPY sold down to session lows below 89, EUR/JPY dropped to 126.50, and GBP/JPY declined to 134.30. In commodity related FX, AUS/USD volatility was subdued within a 0.6840-0.6930 range, and USD/CAD continued to rally on energy weakness with intra-day support found at finding continued buying interest at 1.2030. In emerging Asian currencies, SGD sold off sharply for the second straight session with USD/SGD taking out 1.45, while Korean Won consolidated a month long rally with USD/KRW contained by 1,300.

Crude oil prices are currently higher and have moved between gains and losses during the Asian session. In NY trading, oil prices declined by close to 10%, falling to levels not seen since June of 2004. Overall, crude oil prices continue to move lower despite OPEC's recent record production cut, as markets evaluate if the output reduction will be able to offset declining demand and the prospect of a global recession. In other news, Japan's largest refiner, Nippon Oil, said that it expects to refine 25% less crude oil in Jan on a year on year basis due to weaker domestic demand. Today's report from Nippon Oil follows the company shutting its 110K bpd Mizushima crude distillation unit due to poor demand in Japan. Spot Gold is declining as the USD has rebounded against the euro. During the NY trading session the COMEX gold futures contract for Feb declined by close to $8.00, as the metal eased away from the 2-week high of around $881.20, which was hit earlier in the week.

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