Yen retreats on BOJ expectations after big gains

TOKYO : The yen fell in early Asian trade on Wednesday on expectations of significant monetary stimulus by the Bank of Japan later in the week, a day after it had posted its biggest gains in a month on disappointment at the scale of the government’s fiscal stimulus plan.

The yen (JPY) fell about 0.4 percent in early trade to 105.06 per dollar, retreating from Tuesday’s high of 103.995 per dollar. On Tuesday it rose 1.1 percent, its biggest daily gain since June 24.

“There are still expectations the Bank of Japan will ease on Friday. The market is still wary of any surprises from (Governor Haruhiko) Kuroda,” said Kyosuke Suzuki, director of forex at Societe Generale.

Most market players expect the Bank of Japan to announce more easing measures at its policy review on Friday, including deepening negative interest rates and increasing its purchases of riskier assets such as stocks as well as government bonds.

But at the same time, many also believe that any additional stimulus, which would be Karoda’s fourth policy easing, is unlikely to sustainably push down the yen given the currency strengthened even after the BOJ’s surprise decision in January to introduce negative rates.

Expectations Japan could adopt a radical policy mix of “helicopter money” – deficit spending financed by a central bank money printing – are also fading.

Japanese financial daily Nikkei reported on Tuesday that Japan’s government is likely to inject 6 trillion yen ($ 57 billion) in direct fiscal outlays into the economy over the next few years under a planned stimulus package.

That was far smaller than market expectations of 10 trillion yen and reduced speculation that the Bank of Japan, which ends its policy meeting on Friday, would adopt “helicopter money” fiscal stimulus.

The dollar was steadier against other currencies ahead of the Federal Reserve’s policy announcement later on Wednesday.

The Dollar Index against a basket of six major currencies .DOXY =USD stood little changed at 97.170, off Monday’s 4 1/2-month high of 97.569.

Positive U.S. economic data has increased expectations that the Fed could raise rates in December, boosting the relative attraction of the dollar.

Money market futures are pricing in a nearly 50 percent chance of a Fed rate hike by December.

The euro EURO= was little moved at $ 1.0983, ahead of major euro zone economic data due on Friday including consumer price inflation and economic growth.

The publication of bank stress test results on the same day will be closely watched, with all eyes focused on Italian lenders, seen as the weakest link because of their low profitability and large holdings of non-performing loans.