LONDON (AFX) - The yen tumbled further, thanks to a surge in carry trades after a Bank of Japan rate setter signalled he is in no hurry to hike borrowing costs in the country.
The latest salvo in the war of words between the Europeans and the Japanese came from Bank of Japan (BOJ) rate setter, Hidehiko Haru, who said pointedly that inflation is hardly a concern in his country and that policy adjustment will take place gradually.
'It seems quite clear that on the basis of these comments, Mr Haru will not be amongst those voting for a rate hike at the BOJ's next meeting in just under a fortnight's time,' said Neil Mellor at Bank of New York.
'Thanks largely to Mr Haru's comments, the yen crosses have been on the march today with the JPY losing 0.3-0.4 pct to its fellow majors and around 0.6 pct to the Australian dollar,' he added.
At 10.40 am GMT, the euro was at 157.44 yen up from 157.22 around 9.30 am, the pound was at 238.50 yen up from 238.14 while the dollar was at 121.18 yen, up from 121.12.
Most analysts acknowledge that the Japanese central bank has been right to err on the side of caution as domestic consumption in the world's second biggest economy remains sluggish. The Europeans, however, believe the yen is undervalued. At the heart of their argument is the phenomenon of carry trades which rely on the the near zero level of interest rates in Japan. Carry trades occur when traders borrow in low yielding currencies such as the yen and Swiss franc to invest elsewhere where interest rates are higher.
European politicians, including German Finance Minister Peer Steinbruck, have made public their intentions to discuss the yen's weakness at the weekend's pow wow of the world's biggest economies. Japanese officials, meanwhile, say the yen only be part of 'routine' discussions.
The yen's latest falls are likely to make the European contingent which will be most than amply represented at the G7 meeting by France, Germany and Italy only more resolved to tackle the yen situation.
'Carry trades are in vogue as G7 nerves settle,' said Steve Pearson at HBOS.
There had been some reduction in carry trades ahead of the G7 meeting and the possibility that the yen will feature high up on the agenda. But the jitters appear to be subsiding.
BNP Paribas analysts believe the G7 may discuss forex markets, but will stop short of calling the the yen 'manipulated' or 'undervalued'.
They see the G7 expressing concerns regarding the size of carry trades and the potential deflationary effect should the carry trade implode, they said, however.
'If the G7 talks about these issues and communicates the discussion to markets the yen will move higher and not lower, as the consensus currently expects,' they added. sivakumar.sithraputhran@thomson.com ss/nes COPYRIGHT Copyright AFX News Limited 2006. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited
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