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Forex Flash: Yen sell off reaccelerates following BoJ action - BTMU

FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that during the Asian trading session USD/JPY briefly rose above the 97.00 level after breaking above resistance from the previous trend high of 96.71, recorded on the 12th March.

he feels that there is no doubt that the new leadership has implemented a very aggressive monetary easing plan marking a decisive break from the previous leadership´s more conservative approach to monetary policy. He notes that under the new regime the size of the BoJ’s balance sheet is set to expand towards 60% of GDP by the end of 2014 from just over 30% at the end of 2012 and it will be primarily driven by gross monthly purchases of JGBs of just over JPY7.0 trillion which even in absolute terms are nearly equivalent to the Fed’s current monthly purchases of assets totaling USD85.0 billion.

However, he comments that they are much more aggressive in relative terms given that the US economy is just over 2.5 times larger than the Japanese economy. he writes, “Even if the Fed was to continue purchasing assets at its current run rate until the end of 2014 its balance sheet would only move towards 30% of GDP from just over 20% at the end of 2012. Of the major central banks only the SNB has a larger balance sheet following aggressive intervention to weaken the Swiss franc totalling around 85.0% of GDP.”

Furthermore, Hardman adds that the new commitment to continue with QE as long as necessary for maintaining 2.0% inflation in a “stable manner” provides a signal that easing will likely extend well beyond 2014. BoJ Governor Kuroda also stated yesterday that the BoJ is ready to do more depending on economic developments. The announcement is intended to have a powerful impact upon market expectations and will support the continuation of the yen weakening trend in the coming years.

He adds however, that the aggressiveness of the programme has already drawn some concern with leading investor George Soros warning that it may lead to an avalanche of yen selling describing the scale of easing as dangerous. Moody’s also stated overnight that it sees risks in new BoJ easing policies in the long-term should confidence in the JGB market “eventually waver” if a sustainable fiscal structure in not put in place.

He finishes by writing, “However the BoJ’s actions are likely to ensure low funding costs at least through to 2014. In their latest monthly report the BoJ upgraded their view of the Japanese economy for the fourth consecutive month overnight which was the longest consecutive stretch of upgrades since 2003. BoJ Governor Kuroda was also reconfirmed overnight by the Diet for a full five-year term.”

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