Japan's Retail Sales Drop on Storm, Sliding Sentiment (Update2)

By Jason Clenfield

Aug. 30 (Bloomberg) -- Japan's retail sales fell more than twice as much as economists expected, as a tax increase and a weekend typhoon kept shoppers away from the nation's department stores and car dealerships.

Sales declined 2.2 percent in July from a year earlier, the Trade Ministry said today in Tokyo, the biggest decline since June 2005. The median estimate of 25 economists surveyed by Bloomberg News was for a 0.8 percent decrease.

Stagnant wages and higher taxes may delay a recovery in spending and leave the economy dependent on sustained overseas demand. Though consumer spending is lackluster, economists attribute much of July's drop to a series of one-time events.

``All the bad factors seem to have fallen in July,'' said Azusa Kato, an economist at BNP Paribas in Tokyo. ``We don't expect consumption to keep deteriorating at this pace.''

The yen traded at 115.61 per dollar at 10:02 a.m. in Tokyo, from 115.72 before the report was published. The yield on Japan's 10-year bond rose 1.5 basis points to 1.595 percent.

Consumer sentiment sank to the lowest level since 2004 in July as gas prices rose to a 20-year high and the rollback of tax rebates a month earlier added to living costs. The government's loss of pension records may result in billions of yen in unpaid benefits, the Social Security Agency said in May.

There was one fewer Saturday in July compared with a year earlier and a typhoon washed out a three-day weekend.

Falling Shares

A 3.9 percent drop in the Topix stock index in July also damped consumer sentiment. Since then the index has declined a further 7.7 percent on concern subprime mortgage defaults will slow growth in the U.S., Japan's biggest export market. The market turmoil prompted the Bank of Japan to keep its overnight- lending rate at 0.5 percent last week.

Sales of clothing fell 9.7 percent in July from a year earlier, today's report showed. Automobile sales slumped 4.8 percent. Sales of fuel, meanwhile, increased 0.3 percent as gasoline prices surged.

Sales at large shops open for at least a year sank 3.8 percent, a backlash after rising at the fastest pace since 1998 in June, when department stores pushed forward the start of summer discounts.

Wholesale revenue rose 6 percent, the 24th consecutive monthly gain, led by cars and construction equipment for export. The divergence between wholesale and retail figures underscores the economy's reliance on demand from abroad.

Wages Slump

Wages have fallen for seven months running as younger workers replace retiring baby boomers, whose paychecks tend to be higher because of Japan's seniority-based compensation.

Those younger workers are showing a feeble appetite for spending. A survey last week of Japanese in their 20s by the Nikkei newspaper showed that more than a third of the country's young people dedicate their disposable income to savings. Only one in four young Tokyoites wants to buy a car, down from one in two in 2000, the survey showed.

The unemployment rate held at a nine-year low of 3.7 percent for a second month in July, a report due tomorrow at 8:30 a.m. will probably show, according to economists surveyed by Bloomberg News. The number of jobs has increased by 1.5 percent in the past 12 months, according to the central bank.

Today's retail report only accounts for spending in shops. It excludes Internet retailing and outlays on services provided by gyms, restaurants and movie theaters. Spending on travel, for example, rose at 10 times the pace of retail sales last year, according to the Japan Association of Travel Agents.

Mizuno Says Loan Crisis Shows Why Rates Need to Rise (Update1)

By Lily Nonomiya

Aug. 30 (Bloomberg) -- Overinvestment was a major cause of the U.S. subprime mortgage crisis and illustrates why the Bank of Japan needs to raise interest rates, central bank policy maker Atsushi Mizuno said.

``Overinvestment amid conditions of ample global liquidity was a major factor in causing the subprime issue,'' Mizuno said today in a speech in Kofu, Japan. The market turmoil ``is proof that keeping rates at levels that stray from fundamentals could actually cause instability.''

Since July, Mizuno, 48, has been the lone advocate of raising rates, arguing that keeping borrowing costs too low could fuel risky investment and hurt economic growth in the long term. The bank's 0.5 percent short-term rate, the lowest among major economies, has encouraged investors to borrow in Japan to buy higher-yielding assets abroad in so-called carry trades.

Mizuno's calls for rate increases have been rejected by his fellow board members, who voted to keep them on hold last week after the market turmoil. Losses on U.S. subprime mortgages drained liquidity from markets, causing global stocks to plummet and the yen to surge as investors sold riskier assets funded by loans in Japan.

Reserve Bank of Australia Governor Glenn Stevens said this month that ``the sooner the Japanese interest rates are able to be normal again, the better from the point of view of the global financial system.''

Central banks in the U.S., Europe and Japan pumped more than $350 billion in the banking system and the Federal Reserve cut the rate at which it lends to banks to ease access to credit.

Small Effect

``We can expect the repricing process in financial markets to move forward once the current liquidity issues subside,'' Mizuno said. ``The chances of this having a serious impact on the real economy are small.''

Mizuno said there's no reason for the bank to lower its forecasts for economic growth and inflation following the subprime collapse and resulting financial-market instability.

``While it's possible that the U.S. economy could slow a bit more than expected, this may be absorbed by solid global growth,'' he said, while adding that the subprime issue remains ``a risk.''

Investors are scaling back expectations for a September rate increase. They now see a 22 percent chance of a move at the Sept. 18-19 meeting, down from 36 percent at the end of last week, according to Credit Suisse Group calculations based on interest payments.

Prices have failed to pick up even as the economy grows. A report tomorrow is expected to show consumer prices excluding fresh food fell 0.1 percent in July from a year earlier, a sixth monthly drop, according to the median estimate of 40 economists.

Bernanke Says Fannie, Freddie Asset Caps Should Stand (Update3)

By James Tyson

Aug. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said relaxing portfolio limits on Fannie Mae and Freddie Mac isn't necessary for the two largest U.S. mortgage finance companies to help stem a surge in foreclosures.

Federal caps on the companies' combined $1.4 trillion in mortgages and mortgage bonds ``need not be lifted to allow them to accommodate new borrowers,'' Bernanke said in an Aug. 27 letter to Senator Charles Schumer, a New York Democrat.

Bernanke's view is in line with the companies' regulator and with President George W. Bush. The Office of Federal Housing Enterprise Oversight on Aug. 10 rejected requests to allow the government-chartered firms to buy more home loans to ease a credit crunch in the mortgage market. Schumer and other Democrats have called for relaxing the restrictions, saying the companies could fill a gap left by investors who fled the market.

Ofheo, as the regulator is known, imposed the limits last year after Fannie Mae and Freddie Mac disclosed accounting misstatements of $11.3 billion. To lift the ceilings, the companies must complete an overhaul of accounting and governance and restore timely financial reporting, the agency said.

The constraints ``were imposed for safety and soundness reasons,'' Bernanke said. ``Policy makers may also want to encourage'' Fannie Mae and Freddie Mac to package and guarantee more home loans as securities for sale to investors, a business line that is ``not constrained by their portfolio caps.''

`Closely Monitoring'

The Fed chief also said that the central bank ``is closely monitoring developments in financial markets.'' He noted that the interest-rate setting Federal Open Market Committee said in a statement it ``is prepared to act as needed to mitigate the adverse effects on the economy'' from the turmoil in markets.

Created by Congress to increase financing for home loans, Fannie Mae and Freddie Mac own or guarantee 40 percent of the $10.9 trillion U.S. residential mortgage market. They profit by holding mortgages and mortgage-backed securities as investments and by charging a fee to guarantee and pool together home loans as bonds.

The companies ``should be encouraged to provide products for subprime borrowers to the extent permitted by their'' federal charters, Bernanke said without elaboration.

The Fed and U.S. Treasury since 2005 have portrayed the assets of Fannie Mae and Freddie Mac more as a threat to market stability than as a lifeline in times of declining mortgage credit.

The two companies could trigger financial market turmoil should they fail to hedge their holdings against interest rate changes and other risks, the Fed and Treasury have said. They have called on Congress to mitigate the ``systemic risk'' by creating a supervisor with power to pare the companies' assets.

Strengthened Oversight

Bush said Aug. 9 that Congress must pass legislation strengthening oversight of the companies before the administration lifts the restrictions on the portfolios.

Fannie Mae rose $2.19 to $65.76 at 4:20 p.m. in New York Stock Exchange composite trading, while Freddie Mac gained $2.05 to $63.25. Shares of both companies pared gains after Schumer released the letter, before resuming their advance.

Fannie Mae must restrict its portfolio to $727.2 billion, the level on Dec. 31, 2005, while Freddie Mac must constrain annual growth of its $720.6 billion portfolio to 2 percent. The two also can't buy mortgages of more than $417,000 for a single- family home in most states.