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Forex Flash: Yen weakens as markets stabilize after election shock - BTMU

Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the yen and the Dollar have continued to give back some of their recent gains following the shock Italian election results as financial market conditions are gradually stabilizing again.

He sees that the Yen has also weakened modestly following the official confirmation overnight that Japanese Prime Minister Abe has nominated Haruhiko Kuroda to be the next BoJ Governor, and Kikuo Iwata and Hiroshi Nakaso as Deputy Governors.

He writes, “The Diet is expected to vote upon these nominations on the 14th and 15th March. Head of the DPJ Kaieda has subsequently stated overnight that his party won’t unnecessarily delay BoJ appointments. The DPJ has called for nominees who preserve the BoJ’s independence, have the ability to communicate with international investors and policymakers, and have organisational skills.”

Hardman continues to highlight that as reported earlier in the Nikkei this week, it appears unlikely that any of the three proposed nominees will be blocked although some DPJ officials have expressed concerns about Kikue Iwata. He feels that the nominations of Kuroda and Iwata should reinforce the ongoing policy shift at the BoJ towards implementing more aggressive monetary easing in an attempt to meet their new 2.0% inflation target.

He feels that more aggressive easing will continue to focus upon domestic instruments such as expanding purchases of JGBs with longer maturities and of riskier assets. He writes, “Iwata has already expressed that he would like to see current account balances at the BoJ increase from around JPY50 trillion to about JPY80 trillion. He hopes the flooding of liquidity into the financial system will encourage a meaningful pick up in money supply growth to the broader economy.”

However. the potential policy option of foreign bond purchases appears to be off the table for now with Finance Minister Aso explicitly stating overnight that the BoJ should avoid foreign bond purchases as it directly impacts the level of the Yen.

Hardman finishes by commenting that, “With the Yen having already weakened sharply in anticipation of looser BoJ monetary policy ahead proving successful at reflating the Japanese economy, the scope for further yen weakness in the near-term driven by policy action which merely backs up those expectations is likely to have a more limited negative impact upon the Yen. According to our models, the yen’s overvaluation has already been reversed.”

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