Daily Forex Outlook: Yen (JPY) Dropping ahead of BOJ Policy Meeting

The Japanese yen is off to another weak day, with Japan’s incoming Prime Minister Shinzo Abe reiterating his calls for the Bank of Japan (BOJ) to set a higher inflation target. As a result, the yen edged lower against the dollar, Reuters reported on December 18. Meanwhile, the single currency was boosted by an improvement in risk appetite on hopes that the looming fiscal cliff in the US would be averted.

**Yen Weakness Trend Seen as Persisting**
Reuters reports that the dollar climbed 0.1 percent versus the yen, to ¥83.99, not far from the ¥84.48 level seen on December 17. The leader of the Liberal Democratic Party (LDP), Shinzo Abe, told reporters that he requested BOJ governor Masaaki Shirakawa to consider establishing a two percent inflation goal, with the present target being one percent.

“There is a good chance that the yen’s weakness may persist, especially heading into the end of the first quarter (of 2013),” noted Sim Moh Siong, FX strategist for Bank of Singapore, as quoted by Reuters. Reuters also quotes sources familiar with the BOJ’s thinking as estimating that the central bank will consider whether to adopt the two percent inflation target no later than January.

“There is a cautious view that the yen has been dropping too rapidly,” commented Noriaki Murao, managing director of the marketing group at Bank of Tokyo-Mitsubishi UFJ Ltd, as quoted by Bloomberg. “But I think yen-selling is only half done. Expectations are increasing for the BOJ to ease significantly.”
**Euro Boosted by Fiscal Cliff Optimism**

On December 17, Reuters reported that the euro gained 0.1 percent versus the greenback, reaching $1.3170 and hovering near a high of $1.3191 touched in the previous session, the highest level observed in more than seven months. The single currency advanced against the yen as well, with Bloomberg reporting that Japan’s currency weakened 0.2 percent to 110.60 per euro, after sinking as low as 111.32 on December 17, the weakest since March 21.

!m[Euro (EUR) Gains Ground on Fiscal Cliff Hopes](/uploads/story/1048/thumbs/pic1_inline.png)
The euro found support in improved risk appetite on hopes of progress made in US budget talks. On December 18, the Financial Times reported that President Barak Obama offered to back away from his position that tax hikes should begin at $250,000 in annual income, narrowing the gap between the White House and Republicans.
**Aussie (AUD) Loses Ground on RBA Minutes**
The Australian dollar predictably held losses with the Reserve Bank of Australia (RBA) releasing minutes from its policy meeting on December 4, when it cut its overnight cash-rate from 3.25 to 3 percent. Bloomberg reports that the Aussie slid 0.1 percent to $1.0540 from December 17, when it fell 0.1 percent to $1.0552.
“The Aussie got sold first on expectations of additional rate cuts from the RBA,” noted Takuya Kawabata, a researcher in Tokyo at Gaitame.com Research Institute Ltd, as quoted by Bloomberg. “The Aussie was then bought back as the market digested some the positive comments about Chinese growth. The RBA may wait and see for a little while before resuming rate cuts next year.”