The Jiji news agency reported late on Tuesday that the Bank of Japan will likely discuss hiking rates 25 basis points to 0.5% in January....

... As a result, the yen and JGB yields paid no heed to the economic data out of Japan and surged higher following days of substantial weakness.

Jiji, which cited no sources for the report,
added that the decision could be postponed to February or later in the event of
anything unexpected happening in financial markets. Given the unsubstantiated nature
of the report, not to mention the broad weakness of recent economic data, it is
unlikely that the Bank of Japan will dare to hike in January and more probable that
the monetary policy committee will opt to do so later in the first quarter of 2007.
Furthermore, the release of retail sales for November missed expectations by nudging
0.1% higher for the month, while the annual rate slipped to -0.1%. This data was
just one more piece of evidence pointing to weak consumption in the Japanese
economy, which will likely leave traders skeptical of the Jiji news agency report.

Bonds - Japanese 10-Year Government Bonds

Yields on 10-year JGBs rebounded from 10-month lows up to 1.628% as Japanese
bonds sold off on the Jiji news agency report which saidthe Bank of Japan will
likely discuss hiking rates 25 basis points to 0.5% in January. Given the array of
weak consumption and CPI data out of the country, the jump in JGB yields could be
temporary as the BOJ is likely to hold off until later in the first quarter of 2007
before tightening monetary policy for the first time since July.


FX - USD/JPY

USD/JPY fell back below the 119.00 level towards 118.50 in Asian trading on the Jiji
news agency report that raised speculation the Bank of Japan may hike rates to 0.5%
in January. However, yens gains could be temporary as retail sales missed
expectations and continued to signal broadly weak consumption in Japan. While sales
edged up 0.1% for the month of November, the annual rate slipped to -0.1%, in line
with the recent overall household spending report for the same month. With trading
remaining choppy amidst low-liquidity typical of this holiday week, price action
could be volatile until the New Year, especially ahead of industrial production data
and the labor cash earning report tomorrow.

Equities - Nikkei 225 Index

Equity traders ignored Japanese economic data for the day, as media reports of
recent talks between the chairman of Toyota and the chief executive of Ford sent the
Nikkei 225 index up 0.31% to a seven-month high of 17,223.15. While Toyota played
down the significance of the discussions and dismissed the idea that the companies
were in tie-up or technology-sharing talks, shares in the company jumped 1.93% to
close at an all-time high of 7,920 yen. Meanwhile, Nippon Steel extended gains made
yesterday with shares up 0.16% to a 15-year high of 643 yen on expectations that the
steel sector would secure a fourth year of price rises with major customers, such as
ship-builders.


Kindest Regards,


Terri Belkas
Forex Capital Markets LLC
New York, NY 10005
Tel (212) 897-7660
Fax (212) 897-7669
Toll Free 888-503-6739
tbelkas@dailyfx.com


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