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<st1:State w:st="on"><st1lace w:st="on">NEW YORK</st1lace></st1:State> -(Dow Jones)- With traders aggressively selling yen ahead of Friday's Bank of Japan policy meeting, the market could be doing its heavy lifting before the central bank even delivers its policy statement. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>
The recent yen sell-off comes as investors - while convinced the Japanese central bank will hike rates for the first time in five years Friday - start to price in the likelihood that the BOJ will hedge its bets when it comes to the outlook for more rate hikes. <o></o>
On Wednesday alone, that expectation drove the yen down 1.3% versus the dollar, bringing the <st1:country-region w:st="on"><st1lace w:st="on">U.S.</st1lace></st1:country-region> unit to Y115.60 recently, according to EBS, from Y114.11 late Tuesday. <o></o>
Given this type of move, many analysts speculate that the yen won't move too much if the BOJ sounds dovish in its policy statement. Conversely, if the BOJ sounds surprisingly hawkish, there could also be limited strength for the yen, given that a large number of market participants expect the central bank will hike just once more this year, bringing its target rate to 0.50% by year-end. <o></o>
The scale-back in expectations comes amid renewed tension between the Bank of Japan and the Japanese Finance Ministry. While the central bank officials have consistently made comments that reflect a concern about rising inflationary pressure - supported by strong economic data as <st1:country-region w:st="on">Japan</st1:country-region> finally emerges from several years of deflation - the MOF is far more reluctant to end <st1:country-region w:st="on"><st1lace w:st="on">Japan</st1lace></st1:country-region>'s long-held zero-interest-rate policy. <o></o>
Much of politicians' reluctance stems from a premature move some five years ago by the central bank to raise interest rates amid lingering deflationary pressure in the Japanese economy - a move retrospectively seen as a misguided. <o></o>
In the latest comments from government officials, Sadakazu Tanigaki, the Japanese Minster of Finance, said Wednesday that "basically, there are no concerns about inflation at this point, and considering that, I don't necessarily see the need to scrap the zero-rate (policy) in a hurry." <o></o>
This back and forth wrangling between the BOJ and the MOF has most players in the market convinced the central bank will soften its statement following the expected rate hike. <o></o>
A Fine Balance
<o></o>
Indeed, because the BOJ is attempting to walk a fine line between raising rates and minimizing market volatility as a result, the central bank will rely on its policy statement and subsequent press conference to offer subtle - if not frustratingly vague - signals to the market regarding its future policy intentions, analysts say. <o></o>
"Many are expecting that the BOJ will seek to soften the impact of the rate hike by stressing that it is not the beginning of a sequential lifting of rates," Daniel Katzive, foreign exchange strategist at UBS, noted. "Investors could be surprised at the vague wording of the communication." <o></o>
Adding another layer of complexity to the central bank's message will be its discount rate decision, analysts say. An increase of roughly 25 basis points, in-line with the increase in the overnight call rate, would suggest a measured pace of tightening, and one that has been largely priced in. <o></o>
Alternatively, a larger increase in the discount rate - the ceiling for official Japanese rates - up to 0.5% from the current 0.1% for example - would suggest a faster-than-expected tightening pace and could add volatility to the market. "The extent to which the discount rate is hiked will impact how the market feels the BOJ wants to progress with future rate moves," Divyang Shah, global strategist at IdeaGlobal in <st1:City w:st="on"><st1lace w:st="on">London</st1lace></st1:City>, said. <o></o>
Back To Rate Hike Reality
<o></o>
While there is some debate in the market over the size of the BOJ's expected discount rate hike, many analysts agree that 25 basis point increase in the central bank's overnight rate will likely have relatively little effect on the yen. <o></o>
The market may have "gotten ahead of itself in terms of how aggressive the BOJ will be about tightening," Paul Barrett, head of foreign exchange trading at JP Morgan in <st1:State w:st="on"><st1lace w:st="on">New York</st1lace></st1:State>, said, and "is selling the yen broadly as investors reassess expectations for BOJ tightening." <o></o>
Heavy yen selling ahead of the BOJ meeting also means that even if the BOJ does sound hawkish in its statement, any yen rally will likely be muted, Barrett said. <o></o>
"The cost of owning yen is still very expensive,...even if the BOJ does tighten, it's still an expensive currency to hold because its only yielding 50 basis points at most, as opposed to 5.25% in the U.S.," he said. <o></o>
Yet in the medium to long-term, many analysts say they expect the yen to strengthen - and to strengthen markedly more than the euro - thanks largely to a weakening dollar. <o></o>
According to a Dow Jones Newswire survey of 21 leading foreign exchange dealers conducted Monday, the dollar is seen trading at Y110.00 on Sept. 30, sliding to Y107 by the end of the year and reaching Y103.00 at the end of the second quarter of 2007. Comparatively, the euro is expected to end September at $1.29, finish the year at $1.30, and rise to $1.33 by the second half of 2007. <o></o>
July 12, 2006 14:15 ET (18:15 GMT)<o></o>
<o></o>
<?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" /><st1:State w:st="on"><st1
lace w:st="on"></st1lace></st1:State><st1:State w:st="on"><st1
lace w:st="on"></st1lace></st1:State> <st1:State w:st="on"><st1
lace w:st="on">NEW YORK</st1lace></st1:State> -(Dow Jones)- With traders aggressively selling yen ahead of Friday's Bank of Japan policy meeting, the market could be doing its heavy lifting before the central bank even delivers its policy statement. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>The recent yen sell-off comes as investors - while convinced the Japanese central bank will hike rates for the first time in five years Friday - start to price in the likelihood that the BOJ will hedge its bets when it comes to the outlook for more rate hikes. <o
></o>On Wednesday alone, that expectation drove the yen down 1.3% versus the dollar, bringing the <st1:country-region w:st="on"><st1
lace w:st="on">U.S.</st1lace></st1:country-region> unit to Y115.60 recently, according to EBS, from Y114.11 late Tuesday. <o></o>Given this type of move, many analysts speculate that the yen won't move too much if the BOJ sounds dovish in its policy statement. Conversely, if the BOJ sounds surprisingly hawkish, there could also be limited strength for the yen, given that a large number of market participants expect the central bank will hike just once more this year, bringing its target rate to 0.50% by year-end. <o
></o>The scale-back in expectations comes amid renewed tension between the Bank of Japan and the Japanese Finance Ministry. While the central bank officials have consistently made comments that reflect a concern about rising inflationary pressure - supported by strong economic data as <st1:country-region w:st="on">Japan</st1:country-region> finally emerges from several years of deflation - the MOF is far more reluctant to end <st1:country-region w:st="on"><st1
lace w:st="on">Japan</st1lace></st1:country-region>'s long-held zero-interest-rate policy. <o></o>Much of politicians' reluctance stems from a premature move some five years ago by the central bank to raise interest rates amid lingering deflationary pressure in the Japanese economy - a move retrospectively seen as a misguided. <o
></o>In the latest comments from government officials, Sadakazu Tanigaki, the Japanese Minster of Finance, said Wednesday that "basically, there are no concerns about inflation at this point, and considering that, I don't necessarily see the need to scrap the zero-rate (policy) in a hurry." <o
></o>This back and forth wrangling between the BOJ and the MOF has most players in the market convinced the central bank will soften its statement following the expected rate hike. <o
></o>A Fine Balance
<o
></o>Indeed, because the BOJ is attempting to walk a fine line between raising rates and minimizing market volatility as a result, the central bank will rely on its policy statement and subsequent press conference to offer subtle - if not frustratingly vague - signals to the market regarding its future policy intentions, analysts say. <o
></o>"Many are expecting that the BOJ will seek to soften the impact of the rate hike by stressing that it is not the beginning of a sequential lifting of rates," Daniel Katzive, foreign exchange strategist at UBS, noted. "Investors could be surprised at the vague wording of the communication." <o
></o>Adding another layer of complexity to the central bank's message will be its discount rate decision, analysts say. An increase of roughly 25 basis points, in-line with the increase in the overnight call rate, would suggest a measured pace of tightening, and one that has been largely priced in. <o
></o>Alternatively, a larger increase in the discount rate - the ceiling for official Japanese rates - up to 0.5% from the current 0.1% for example - would suggest a faster-than-expected tightening pace and could add volatility to the market. "The extent to which the discount rate is hiked will impact how the market feels the BOJ wants to progress with future rate moves," Divyang Shah, global strategist at IdeaGlobal in <st1:City w:st="on"><st1
lace w:st="on">London</st1lace></st1:City>, said. <o></o>Back To Rate Hike Reality
<o
></o>While there is some debate in the market over the size of the BOJ's expected discount rate hike, many analysts agree that 25 basis point increase in the central bank's overnight rate will likely have relatively little effect on the yen. <o
></o>The market may have "gotten ahead of itself in terms of how aggressive the BOJ will be about tightening," Paul Barrett, head of foreign exchange trading at JP Morgan in <st1:State w:st="on"><st1
lace w:st="on">New York</st1lace></st1:State>, said, and "is selling the yen broadly as investors reassess expectations for BOJ tightening." <o></o>Heavy yen selling ahead of the BOJ meeting also means that even if the BOJ does sound hawkish in its statement, any yen rally will likely be muted, Barrett said. <o
></o>"The cost of owning yen is still very expensive,...even if the BOJ does tighten, it's still an expensive currency to hold because its only yielding 50 basis points at most, as opposed to 5.25% in the U.S.," he said. <o
></o>Yet in the medium to long-term, many analysts say they expect the yen to strengthen - and to strengthen markedly more than the euro - thanks largely to a weakening dollar. <o
></o>According to a Dow Jones Newswire survey of 21 leading foreign exchange dealers conducted Monday, the dollar is seen trading at Y110.00 on Sept. 30, sliding to Y107 by the end of the year and reaching Y103.00 at the end of the second quarter of 2007. Comparatively, the euro is expected to end September at $1.29, finish the year at $1.30, and rise to $1.33 by the second half of 2007. <o
></o>July 12, 2006 14:15 ET (18:15 GMT)<o
></o><o
></o> Don't trade opinion
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