TOKYO (AFX-ASIA) - The dollar/yen rose midmorning on speculation the Bank of Japan may ease monetary policy as early as tomorrow to help out local banks that have suffered from the sharp fall in financial markets, dealers said.
However, they added that investors remain cautious over pushing the dollar sharply higher ahead of the Ottawa meeting of G7 finance ministers starting tomorrow for fear they will make market-moving comments on the yen's weakness.
Repatriation of overseas funds and assets into yen by Japanese firms and banks to cover losses on their holdings of equities and bonds at home ahead of the financial year-end in March also drags on the dollar, dealers said.
Deutsche Bank senior currency strategist Kenneth Landon said the market has been speculating over a further possible easing by the central bank as early as tomorrow due to the sharp falls in almost all local financial markets.
The Nihon Keizai newspaper reported this morning that the BoJ is expected to discuss whether further monetary easing measures are necessary in response to falling stock prices and higher long-term interest rates.
The discussion will include plans to increase the amount of long-term government bonds the central bank buys, so-called 'rinban' operations, to around 1 trln yen a month from 800 bln yen at present, it said.
"There is some speculation of increased 'rinban' purchases by the bank," Landon said, though he noted that market bond yields have been rising recently, suggesting that the market does not believe the easing will boost the economy.
"They are already ... pumping a lot of money into the banking system. The implication for the yen is negative as the supply increases," he added.
Meanwhile, the G7 finance ministers may also focus discussions of Japan on monetary policy, though implicitly hinting that they will accept a weaker yen.
"They will discuss BoJ monetary policy," Landon said. "That those officials have been urging the BoJ to ease policy implies they have to approve of a yen weakening as that is what it means." Japanese market participants continue to bring funds back home from overseas ahead of the fiscal year-end, partly due to losses from the fall in equity and bond markets, but the impact is expected to be a short-term positive for the yen.
"It's a minor issue and would only slow the dollar down. I don't think it would cap it," Landon said.