Wednesday March 8, 2006 - 10:48:08 GMT
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INVESTICA Ltd - www.investica.co.uk
Bank of Japan in fcous
The yen found support close to the 118.0 level against the dollar and strengthened back to around 117.60 in Asian trading on Wednesday. The latest Japanese economic data recorded an increase in outstanding bank loans of 0.2% in the year to February, the first increase for over five years, confirming the recovery in the banking sector and this will reinforce confidence in the economy as a whole.
The Bank of Japan Thursday policy decision will remain the dominant short-term focus. The government has continued to preach caution over a Bank of Japan policy tightening, warning that the bank must prevent a return to deflation. The bank's credibility will, however, be damaged if there is no policy change and the bank will want to assert its independence. The most likely outcome is that the bank will make some change in policy, although there is the potential for this to involve a reduction in the deposits target rather than an outright policy switch.
There will still be pressure for capital repatriation back to Japan on seasonal grounds over the next 2 weeks and there will also be continuing pressure for a reduction in carry trades which will maintain a flow of funds into the yen. In this environment, the yen should be able to resist substantial losses.
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