US fiscal cliff, rising pressure on BOJ undermine yen

Dollar rises to 20-month high against Japanese currency.

TOKYO: Uncertainty over whether US lawmakers will strike a deal by an end-of-year deadline to avert a severe fiscal retrenchment undermined the yen and bolstered Japanese shares on Tuesday in low volume, with many participants away on Christmas holiday.

The dollar rose to a 20-month high of 84.965 yen early on Tuesday in Asia, as Japanese markets caught up with global investors who had reacted overnight to incoming Japanese Prime Minister Shinzo Abe’s weekend comments that raised the pressure on the Bank of Japan.

During a meeting on Tuesday with officials from Japan’s major business lobby, Keidanren, Abe reiterated calls on the BOJ to conduct bold monetary easing to beat deflation by setting an inflation target of 2%.

The head of Abe’s coalition partner said the coalition party and Abe had agreed to set a 2% inflation target and compile a large stimulus budget to help the economy return to growth and overcome deflation.

The yen has come under pressure as a result of expectations that the BOJ will be compelled to adopt more drastic monetary stimulus measures next year.

The dollar was expected to stay firm this week as investors repatriate dollars, and as the US fiscal impasse is likely to continue to sap investor appetite for risky assets and raise the dollar’s safe-haven appeal.

“The dollar is seen relatively well bid, with all focus on the fiscal cliff,” said Yuji Saito, Director of Foreign Exchange at Credit Agricole in Tokyo.

“Negotiations may be carried over the weekend, but markets still expect a deal to be struck by December 31. It is unthinkable that the US will risk driving its economic growth sharply lower by not agreeing to avoid it.”

Japan’s Nikkei stock average resumed trading after a three-day weekend with a 1.1% gain, recapturing the key 10,000 mark it ceded on Friday after Boehner’s failure sparked a broad market sell-off and the Tokyo benchmark closed down 1%. The Nikkei was likely to be supported as long as the yen stayed weak.

Published in The Express Tribune, December 26^th, 2012.