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Forex Flash: Yen rebounds modestly as foreign bond buying plan denied - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen has strengthen modestly in the Asian trading session following comments from japanese Finance Minister Aso overnight who stated that “we don't intend to buy foreign bonds”.

He notes that the policy was included in the LDP´s election manifesto and follows comments yesterday from PM Abe who said that foreign bond purchases “exists as one idea” for future BoJ monetary policy easing ahead. However, foreign bond purchases are likely to prove much harder to implement in reality following the G7 statement last week that clearly highlighted that they would be met with international opposition. G7 members explicitly stated that only monetary easing through domestic instruments will be tolerated.

Hardman continues to note that the paring of more aggressive investor expectations for BoJ monetary easing ahead is helping to stabilize the yen in the near-term. he writes, “The trade-weighted yen index has remained relatively stable since early February following heavy selling since November which has fully erased almost four years of yen gains leaving it back at post global financial crisis levels from late 2009. As a result yen volatility is beginning to ease off again after peaking following the initial release of the G7 statement last week which created some confusion regarding its exact meaning.”

He continues to comment that the release of the BoJ minutes from the 21st and 22nd January meeting when the new 2.0% inflation target was implemented shed a little further light on future monetary policy. A few members suggested extending the maturity of BoJ bond purchases to five years as a future policy option. He comments that “BoJ members Sato and Kiuchi both dissented against adopting the 2.0% inflation target given that: i) it is considerably higher than an inflation rate consistent with sustainable price stability having rarely been achieved over the last twenty years, ii) it is unlikely to exert significant influence over inflation expectations by just setting 2.0% target, and iii) setting target prior to implementing a wide range of efforts required to meet the target such as supply side reforms by the government could impair the credibility of monetary policy as it becomes more obvious the target is unlikely to be achieved.”

Further, he notes that Japanese Chief Cabinet Secretary Suga also stated overnight that Japanese Prime Minister Abe will consider his BoJ nominations after his Summit with US President Obama on the 22nd February, with the BoJ Governor nominee to be presented in the last week of February. Elsewhere, he finishes by noting that the Australian dollar has strengthened modestly following the release of the latest RBA minutes which noted that they are seeing signs that lower rates are beginning to work to stimulate the economy. The comment should help to ease back “more aggressive” expectations of further easing from the RBA although it still clearly holds an easing bias.

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