Yen Firms on Hints Policy Change May Come

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SINGAPORE/LONDON—The Japanese yen firmed on Tuesday after the Bank of Japan (BOJ) maintained its ultra easy policy settings, but markets picked up signals that an end to its negative interest rate policy was approaching.

The dollar was last down about 0.2 percent on the Japanese currency at 147.81, stabilising after a 4.8 percent climb so far this year, on the back of markets pushing back expectations of imminent U.S rate cuts.

The yen is sensitive to the difference in rates between Japan and other markets.

While BOJ Governor Kazuo Ueda gave no hints on whether the bank would pull short-term interest rates out of negative territory at its upcoming meetings in March or April, as many economists expect, he did say the likelihood of Japan sustainably achieving the bank’s 2 percent inflation target was gradually increasing.

He also said many businesses had decided on wages early—Shunto wage negotiations, typically take place in the spring—and that labour unions were asking for higher pay.

“BOJ doesn’t need to wait till Shunto wage negotiations end before assessing whether to normalise policy,” said Christopher Wong, a currency strategist at OCBC

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“Back-to-back annual wage increases (by a larger magnitude this year) is probably something Japanese officials are hoping to see before making a move. This could well imply that (the) March meeting is live.”

Elsewhere, the euro gave back earlier gains to trade flat at $1.0882, as European investors digested a survey of eurozone banks for evidence of the extent to which monetary policy tightening has been passed onto the economy.

The poll showed lenders continued to tighten access to credit in the last quarter of 2023 but fewer banks did so than at any point in the previous two years.

“It seems that almost all the transmission from tighter monetary policy to financial conditions has now happened,” said economists at Nomura.

“For some hawks this may be a concern, potentially pushing out when they think rate cuts should happen. However, we think that the majority of (ECB) Governing Council members are satisfied with the degree of tightening, which has already happened, are pleased that the transmission is slowing down. Hence, we expect cuts from June 2024.”

The European Central Bank meets on Thursday. No change in interest rates is expected but investors will be watching for what it says about its outlook. Market pricing currently shows a reasonable chance of a rate cut by April.

The pound was up 0.07 percent at $1.2721. The main British economic news was a smaller-than-expected budget deficit for December, potentially opening up room for tax cuts in a budget scheduled for March.

The dollar index was steady at 103.3.

The dollar dipped 0.3 percent against the offshore yuan to 7.1722 yuan, while the Aussie rose over 0.5 percent at one point and was last up 0.2 percent at $0.6583.

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