An end to Japan's ultra-loose monetary policy is expected to give a boost to the yen, but with a move already priced into the market, any gains will be limited, analysts said yesterday.
They said the key for the Japanese currency was when interest rates would actually rise, which is not expected until later this year at the earliest.
The US dollar fell to a one-month low of ¥115.45 last week as expectations grew that the Bank of Japan (BoJ) is poised to scrap its policy of flooding the financial system with virtually free credit, possibly as soon as tomorrow.
However the US currency has since rebounded to above the ¥117 level as dealers question whether an end to this policy, known as "quantitative easing," would in itself have much impact on currencies.
"The yen might be bought on an end to the super-loose monetary policy but as the market has largely priced this in, buying would be limited," said Yuji Kameoka, senior economist at Daiwa Institute of Research.
"An end to the current monetary policy in itself would not be a factor to move the forex market drastically. The forex market is traded on the interest rate differentials among economic areas, not only on one country's interest rate moves," he said.
Of 45 global equity and macro managers recently surveyed by US investment bank Merrill Lynch, 67 percent predicted that the yen would go up after an exit from quantitative easing.
Analysts said that with the central bank widely expected to begin mopping up excess liquidity in the banking system, a decision to put off a move until next month could now be negative for the yen.
"The market is vulnerable to the possibility of the BoJ's leaving the current monetary policy unchanged, which could push the dollar up to around the ¥118 level although the gsains would be short-lived," said Daisaku Ueno, senior economist at Nomura Securities Financial and Economic Research Center.
For years speculators have been borrowing funds in Japan where interest rates are effectively zero and investing them in higher-yielding assets such as gold, oil and US government bonds.
An unwinding of these positions, known as "carry trades," requires dealers to buy back yen and was partly behind the Japanese unit's recent rise to one-month highs against the dollar, according to analysts.
However, Kameoka at the Daiwa Institute said there was little possibility of a big change in the yen's carry-trade as short-term official interest rates would remain at almost zero after the end to the current ultra-loose policy.
The dollar rose by about 13 percent against the yen last year as investors flocked to the US in search of rising returns.
The US Federal Reserve has hiked interest rates at 14 successive meetings, taking the benchmark federal funds rate up to 4.5 percent, and is believed to have at least one more increase in the pipeline.
Even the European Central Bank last week jacked up its key lending rate for the second time in three months to 2.50 percent and said it was ready to tighten monetary policy again if needed.
So with interest rates expected to remain close to zero in Japan for some time to come, the yen is unlikely to benefit just yet from a narrowing of the interest rate gap with other major economies, analysts said.
"Even if BoJ ends its current monetary policy in March, the initial reaction of yen-buying would be limited," agreed Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase Bank.
"Looking back at the past dollar-yen relationship ... the dollar was actually bought when the BoJ raised interest rates," Sasaki added.
"From a long term perspective, I don't think BoJ's monetary policy has much to do with the dollar-yen trade," he said.
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