The yen remained firm near one-month highs against the dollar as the prospect of tighter Japanese monetary policy edged nearer following comments from leading cabinet members, including Prime Minister Junichiro Koizumi. "The catalyst for the overnight yen move (higher) appears to have been comments from three Japanese cabinet members suggesting that the government is no longer attempting to dissuade the BoJ from an early end to quantitative easing," said Steve Pearson, currency strategist at HBOS. Fiscal and economic policy minister Kaoru Yosano said it would be "OK" for the Bank of Japan to end its quantitative easing policy, while Prime Minister Koizumi and finance minister Sadakazu Tanigaki indicated they would respect such a move.
The market interpreted the comments as suggesting that the Bank of Japan has already decided on a policy change by April. As a result, the dollar fell to a low of 115.68 yen, its lowest since Jan 26, while the euro slipped to 137.17 yen, its lowest level since Jan 12.
Investors have increasingly been on the lookout in recent weeks for any clues as to when the BoJ will end its current super-loose monetary policy, which focuses on flooding the financial markets with short-term money, rather than tweaking interest rates, in a bid to end years of deflation.
The BoJ has said it won't amend its current policy until core consumer prices stabilise and move above zero pct for a sustained period, and there is no indication that deflation will make a comeback.
This week's key Japanese release will be Thursday evening's January CPI data, which analysts said could well provide the catalyst to a change in policy at next week's BoJ meeting. Analysts anticipate a 0.4 pct year-on-year rise in the core rate, up from the 0.1 pct recorded in December. "Most important will be CPI, which is expected to grow year-on-year after stripping out both food and energy prices," said UBS analyst Ashley Davies.
Elsewhere, there is a plethora of economic releases from the 12-nation euro zone to keep markets busy.