The dollar fell to a one-month low against the yen as comments by government ministers suggested the Bank of Japan will face little opposition as it moves toward ending its super-easy monetary policy. Government bond prices also fluctuated wildly, with five- and two-year bond yields touching their highest levels in more than five years. Investors seemed mostly to be reacting to comments over the weekend by Economy Minister Kaoru Yosano, who said the economy was no longer in deflation, or a state of decling prices, and hinted the government may be giving a go-ahead for the Bank of Japan to tighten policy as the economy shows signs of recovery.
"We are no longer in deflation, in the classical sense of the word," Yosano said on public broadcaster NHK Sunday. "If conditions are met, I think it is all right for the BOJ to make the decision." The Bank of Japan has made it clear that it won't change its policy until year-over-year price changes stabilize at zero or higher. Last week, central bank governor Toshihiko Fukui told a Lower House financial committee that conditions for ending its policy are "gradually ripening."
However, Japanese Prime Minister Junichiro Koizumi contradicted Yosano's assertion that deflation was vanquished, highlighting the debate over the issue. "I cannot say we have overcome deflation," Koizumi told reporters Monday. Government officials in the past have urged the bank to go slow so as not to squelch the recovery.
Still, he denied any rift with the Bank of Japan. "The government and the BOJ are working as one toward overcoming deflation," Koizumi said. "In line with this policy, I think the BOJ will make a judgment about what kind of measures are necessary." Currency and bond traders interpreted the mixture of comments as signaling a conciliatory tone from the government as the central bank considers the timing of changing policy.
The yield on the two-year bond rose to a high of 0.520 percent in morning trading, a level not seen in more than five years, while the five-year yield jumped to 1.150 percent, the highest level since November 2000.