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Forex pairs in this Article » USD/JPY (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that financial amrkets started the day in optimistic moods after ECB President Draghi gave an upbeat press conference following the upbeat monetary policy decision. Further, the Japanese Government today presented its fiscal stimulus package to help support economic growth there.

He notes that the USDJPY rate broke new ground hitting an intra-day high of 89.35 while the Nikkei advanced 1.4%. The total size of the fiscal stimulus package is cited as JPY 20.2 trillion, although central government funds for the package is put at JPY 10.3 trillion. In order to finance this, the government will compile a JPY 13.1 trillion extra budget for the current fiscal year. Halpenny sees that financing of this will include about JPY 8 trillion of debt issuance - just short of 3.0 trillion will be through 'bridge loans' already planned to cover pension payments and about JPY 5.0 trillion in construction bonds.

According to the Nikkei, some of these funds will go to "enhance road safety on school-commuting roads" and for building more quake-resistance roads and bridges. He writes, "Call us a sceptics but we fail to see how this stimulus package will be any different to any others in giving a temporary lift to economic activity before fading. If that's the case, then altering inflation expectations that could encourage greater outflows of funds from Japan is unlikely to take place."

Still, the pro-active stance of the government puts the pressure on the BOJ to follow with an inflation target when it meets on 21st -22nd January. He notes that one candidate for the job of new Governor, Kazumasa Iawata, stated that the BOJ should have a flexible inflation target and also mentioned 95.00 as an ideal level for USDJPY. With USDJPY now up nearly 15% in three months, the government is at risk of coming under pressure from abroad. In that regard Halpenny notes that St. Louis Fed President Bullard's comment that he was "a little disturbed" by the direction Japan was taking with its foreign exchange policy, which had become a lot more explicit. He added that a beggar-thy-neighbour policy would have a bad outcome.

He finishes by writing, "Finally the data from Japan today did lend itself to yen selling. The current account deficit was larger than expected at JPY 222.4bn but more interestingly, there was a very sharp jump in the Eco Watchers' Survey to 51.0, the highest since April 2007. If the household sector was to sustain this lift in confidence it would certainly raise the prospects of greater risk appetite and hence greater capital invested abroad which would be a potential sustainable factor in weakening the yen."
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