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Forex pairs in this Article » USD/JPY (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ feels that the Yen has continued to strengthen in the Asian trading session following yesterday's landmark BoJ monetary policy meeting.

He feels that the Yen rebound reflects some initial investor disappointment over the scale of planned monetary easing announced by the BoJ yesterday which did not match the bolder step to introduce a "full-fledged" 2.0% inflation target. The BoJ's reluctance to further increase planned asset purchases in 2013 and extend duration of JGBs purchased highlights that under the leadership of Governor Shirakawa it is not yet willing to fully commit to achieving the new 2.0% inflation at the earliest possible time.

He adds that further open ended purchases starting from 2014 will be mainly T bills which are the closest substitute for cash likely limiting the stimulative impact upon the private sector, while monthly JGB purchases will remain at roughly the same rate as in 2013. Overall, he sees that the policy announced is more of the same which immediately undermines the credibility of the new 2.0% inflation target. However, he writes, "The scope for disappointment may prove short-lived with expectations likely to build that the replacement of Governor Shirakawa in April will herald a more appropriate aggressive shift in policy easing ahead to meet the new 2.0% inflation target."

As such, he believes that the initial Yen rebound may also prove short lived with market attention next likely to focus upon who will become the next BoJ Governor. However, the Japanese authorities attempts to weaken the Yen further still are likely to become more difficult ahead judging by building international opposition. Bundesbank President Weidmann and a senior German lawmaker have expressed concern this week over the Japanese authorities' attempts to weaken the yen which may result in Germany raising the issue with other G20 members.

At present the case against Japan is not compelling as recent Yen weakness can easily be described as over valuation unwinding which has been triggered by the Japanese authorities. However, Hardman notes that if the yen was to materially weaken further lifting USDJPY close to and above 100.00, it would then weaken that defence as the yen would become undervalued. Still however, he sees that the Japanese authorities can argue that they are merely echoing policies adopted by the US with planned aggressive BoJ easing in response to the Fed's open-ended QE operation with deflationary pressures even more intense in Japan.

He finishes by writing, "The more controversial part is the increasing political interference in the BoJ's actions and verbal intervention to weaken the yen which if paired ahead now that the 2.0% inflation target is in place would likely help to ease international tensions while allowing ongoing BoJ easing to still weigh upon the yen. Elsewhere the Australian dollar has weakened overnight following another subdued Australian inflation report in Q4 consistent with weak domestic demand growth reinforcing the likelihood of further RBA rate cuts in 2013. Inflation pressures remain in the bottom of the RBA's target band."
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