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Forex pairs in this Article » EUR/JPY, USD/JPY (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen has continued to weaken in the Asia trading session with USDJPY and EURJPY rising above the 90.00 and 120.00 levels respectively.

Yen selling momentum has been reinforced overnight by increasingly aggressive investor expectations regarding the outlook for further BoJ monetary easing heading into next week's landmark meeting. Also, the Nikkei has reported overnight that the BoJ is likely to announce next week that it plans to expand its asset purchase programme again by roughly JPY10 trillion lifting planned asset purchases in 2013 to JPY46.0 trillion. Hardman highlights that it would be the first time that the BoJ has eased monetary policy at two consecutive meetings in more than nine years.

However, more importantly for shaping investor expectations regarding the likely scale of further BoJ monetary easing, he notes that it appears increasingly likely that the BoJ will also adopt a "fully fledged" 2.0% inflation "target" over the "medium-term" replacing the current 1.0% price stability "goal". In doing so it would bring the BoJ's monetary policy framework into line with other inflation targeting major central banks such as the ECB and BoE.

He continues to explain that the introduction of a hard 2.0% inflation target will lead to investor expectations of ever more aggressive BoJ monetary easing ahead given that under current projections inflation appears set to fall well short of the new 2.0% target in the medium-term. It is understandable under these circumstances as has been speculated overnight that one policy option under consideration which would help make the commitment to the new target more credible is the potential adoption of a commitment to open-ended monetary easing from the BoJ until the inflation goal is within reach more akin to current Fed policy.

Other policy options which reportedly are under consideration are: i) a pledge to maintain the balance of the asset purchase programme beyond 2013, and ii) scrapping the 0.1% interest paid on financial institutions' reserves held with the BoJ. Hardman notes that Economy Minister Amari has stated that one policy option not on the table is the adoption of a Fed-like dual mandate to include employment. A commitment to unlimited easing alongside the implementation of a "full-fledged" 2.0% inflation "target" would prove the most powerful policy at impacting investor expectations over the potential scale of further BoJ monetary easing ahead and as such would be more likely to have a greater sustained negative impact upon the yen.

The yen has also been weakened overnight reflecting increased expectations over the scale of yen weakness the government would like to achieve. Yale Professor Hamada who is a key advisor to Prime Minister Abe stated that Japan needs to bring the yen back to a good level which he suggested was around 95.00-100.00 while saying that 110.00 would be too weak.

Hardman finishes by noting that elsewhere in Asia, investor risk sentiment has been improved by the release of the Chinese GDP report for Q4FY12, which revealed that the rebound in growth heading into year end proved stronger than expected accelerating to 7.9% from 7.4% in Q3 2012. He closes by writing, "For the year as whole growth slowed to 7.8% in 2012 from 9.3% in 2011 exceeding the government's target of 7.5%. We expect growth to rebound only modestly in 2013 to just above 8.0% consistent with a gradual decline in USD/CNY in 2013 of around of 2.9%."
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