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Forex pairs in this Article » (Barcelona) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen remains on the defensive in the Asian trading session in anticipation of further monetary easing at Thursday's BoJ monetary policy meeting.

They feel that investor expectations are high that the election of the new LDP government will lead in a significant policy shift to a more aggressive monetary easing from the BoJ, which has resulted in the nominal trade-weighted Yen declining by almost 10% since its recent peak in June.

The scale of the adjustment lower is now almost exactly the same as experienced during Q1 2012 when the BoJ adopted the 1.0% inflation goal. On that occasion Yen weakness proved only temporary as the new inflation goal was not backed up by credible BoJ policy action. However, Hardman notes that it appears more likely now that Yen weakness will prove more persistent with the new government more actively seeking a shift in BoJ policy and BoJ Governor Shirakawa and his two Deputy Governors set to be replaced by candidates with similarly dovish leanings.

He continues to flag that overnight, it was reported that the BoJ will ease monetary policy at this week's meeting which he expects to be in the form of additional asset purchases totalling JPY 5-10trn. The report also suggests that the BoJ will also be under pressure to adopt a 2.0% inflation target/goal no later than January.

According to sources, the report suggests that the announcement may come in the form of a joint statement between the BoJ and the Government, pledging to take measures to aim for the 2.0% inflation in the "long run once the 1.0% inflation goal had been met." This week, the BoJ policy meeting may come just too soon for an alteration in the inflation goal, with the new PM Abe set to only announce his new cabinet on the 26th December. Additionally, the Japanese media have speculated overnight that Taro Aso, a former PM and veteran law maker which is expected to toe the party line, will become a finance minister.

BoJ officials close to Shirakawa are wary of setting a 2.0% inflation target without having effective means to achieve it and in reality structural economic fundamentals which have resulted in inflation remaining below 2.0% for the most part since the early 1980's are still in place highlighting the scale of the underlying problem.

Yen selling has also been supported since June by improving investor risk sentiment which has boteh eased safe haven demand and encouraged the build up of Yen funded carry trades. Hardman finishes by noting that in the latest IMM report, speculative net long positioning g for the high yielding Australian and New Zealand dollars is currently at or close to record highs. He writes, "Our BTMU risk index has remained in risk seeking territory since June making it the longest consecutive period since between March and November 2009 during the initial recovery phase from the global financial crisis."
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