Yen advances on hopes for policy change

The Japanese yen hit a four-week high against the US dollar in morning trade in Europe on Friday as anticipation grew that the Bank of Japan will soon abandon it’s loose monetary policy. The speculation has been accelerated by comments made by the governor of the Bank of Japan on Friday that repeated his testimony before parliament Thursday that conditions are “coming into place” to justify a policy shift. Core inflation in Japan, excluding fresh food prices, has been at or above zero for three months in a row.

Still, despite speculation in the Japanese media that a change in policy could begin as soon as the beginning of March, some analysts doubt that any change could come before April at the earliest. Also acting to dampen expectations somewhat are indications that there is disagreement between the Bank and the Japanese government about exactly how ready the economy is for a shift in policy. The Japanese finance minister said on Friday that while the economy is improving, it is still in deflation.

Despite the uncertainty caused by these conflicting signals, the yen gained ¥0.35 to ¥116.77 in relation to the US dollar. It was also up ¥0.7 to ¥138.95 versus the euro and it advanced ¥1 against sterling to ¥204.24.

The Australian dollar gained 0.2 cents to $0.7405 versus the US dollar on a quarter-on-quarter increase of 2.1 percent in Australian housing prices in the fourth quarter of 2005, after no growth at all in the third quarter.

Even though it dropped in relation to the yen and the Australian dollar, the US dollar gained 0.2 cents to $1.1899 in relation to the euro and was up 0.2 cents to $1.7493 against sterling.

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