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Forex pairs in this Article » USD/JPY (London) - USD/JPY continues to drift upwards, breaking to new five-year highs at JPY105.4415. Japanese markets are closed today, but the pair has been driven by diverging monetary policy expectations between the US Federal Reserve and the Bank of Japan.

Aggressive BoJ inflation targeting

The Fed announced on 18 December that it would be cutting its monthly asset purchases by USD10bn to USD75bn, citing an improving US economic landscape. It is anticipated that the Fed will taper in USD10bn increments, winding up its quantitative easing programme before December 2013.

By contrast, the Bank of Japan is expected to continue or extend its aggressive bond purchase programme in an effort to fight deflationary pressures. Bank of Japan officials have pledged to expand the monetary base by an annual 60 trillion to JPY70 trillion as they push towards their target of 2 percent inflation. Though they have denied targeting the currency, recent yen weakness will help import some of the BoJ’s much desired inflation.

USD/JPY could be boosted by PMIs

US PMI number due later today are expected to show a drop from November’s three-year high of 57.3 down to a still-robust 56.8. USD/JPY has climbed 0.01 percent in thin markets. Strong US data may boost the pair further, but could be capped by trading conditions.
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