The yen fell to its lowest in almost four years after the Bank of Japan voted to delay an increase in its benchmark interest rate, the lowest among major economies.
The BOJ left interest rates unchanged with a split vote of 6-3, but it left the door open for a hike at the February meeting. The BoJ monthly report pointed out that the economy was
weaker than expected in the October half yearly outlook report, but the that economy was expanding moderately and the BoJ has kept its assessment unchanged. The BoJ also noted that Japanese CPI was weaker than projected in October, but core CPI is likely to remain in positive territory.
But the latest flow data from the MOF shows that there has been no decline in appetite for using the yen as a funding currency with continued large money market outflows seen last week, with foreign investors selling Y331.7 bln of Japanese money market instruments in the week ending January 13th. Total net portfolio outflows for the week amounted to Y84.6bln.
The yen was the worst performer of the 16 most-active currencies as Governor Toshihiko Fukui said rate increases will be gradual.
USD/JPY is keeping the pressure on the upside with gains above the 120.90 level now targeting the high of 121.40 from December 2005 and then 121.75. EUR/JPY has also broken higher through the initial resistance at 156.35, putting the focus back on the 158.00 high from early January.
AUD/JPY, the carry trade barometer, has also accelerated to the upside with a break above the previous 94.95 high, now opening upside potential towards the 100.00 area, a level last achieved in 1997.
The BOJ for a sixth month held the key overnight lending rate at 0.25 percent.
Declines for the yen may be limited as traders increased bets the Bank of Japan will raise rates at the next meeting on Feb. 21, as three of nine board members cast dissenting votes. Traders see a 69 percent chance of an increase at that meeting, compared with 30 percent, according to calculations by Credit Suisse Group based on contracts for the exchange of interest payments. The past six decisions were unanimous.
A report from the Investment Trust Association in Japan this month showed net purchases of foreign assets surged by 1.4076 trillion yen ($11.65 billion), the largest monthly increase since 1989, when the association began compiling the data. The total amount reached a 17-month high of 27.7216 trillion yen.
The Fed has held its benchmark interest rate at 5.25 percent since June after 17 consecutive boosts from June 2004. The European Central Bank’s rate is 3.50 percent while the Bank of England last week hiked the rate at par with dollar rates to 5.25 percent.
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