Monday August 8, 2005 - 10:02:39 GMT
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INVESTICA Ltd - www.investica.co.uk
Japan economic optimism intact
The yen was undermined on Friday by a combination of high oil prices and political uncertainty and the yen weakened to lows beyond 112.0 against the US currency. These pressures continued in Asian trading on Monday and the yen weakened to 112.6. The US currency was unable to sustain the gains and weakened back to 112.0.
The Upper House has rejected the postal legislation and the government is likely to call an election for early September, probably for September 11. The markets had become increasingly concerned over the political situation at the end of last week and this will limit the currency impact, although there are still negative yen implications. There will be concern that Prime Minister Koizumi will lose the election and this would undermine the overall reform agenda and would tend to weaken the yen in the medium term.
The economic news remains more favourable with a slight improvement in lending statistics and evidence of an economic recovery. Significantly the Nikkei index recovered from early loses and closed higher on Monday. This suggests that underlying optimism over the economy is still intact at this stage.
The latest IMM data recorded a modest cut in short yen positions of around 4,500, but there was still a net short position of over 43,000 contracts which will maintain the potential for a closing of short yen positions. This will limit the potential for dollar gains.
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