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Higher Hopes for Japan

The days of zero interest rates look numbered after the government voices some optimism.
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The prospect of Japan unraveling its zero interest rate policy looked brighter Monday after the government gave its nod.

The Bank of Japan has been hinting at such a move since 2005, but the government had so far seemed less than thrilled with any action that would prop up the yen, making Japanese exports less competitive compared with its Asian rivals.

However, amid increasing evidence that the Japanese economy is emerging from seven years of deflation, the government signaled it won't stand in the way of the central bank.

"The current rebound in the economy has legs," Economic Minister Kaoru Yosano told Japanese television on Sunday. "It's OK for the central bank to change policy," he said, according to



On Friday, BOJ governor Toshihiko Fukui said that with the bout of deflation nearly over, the bank would "gradually" end the ultra accommodative monetary policy it put in place in 2001.

And Monday, Japanese daily


reported that the government has decided to support a change in policy as early as the next BOJ meeting on March 8-9.

Both the Japanese government and the BOJ had pledged to keep the easy policy until core prices stopped falling for at least a few months. On Friday, Japan's consumer price index is expected to show core inflation rising at 0.4% in February, marking the third consecutive monthly increase.

"This could further serve as the natural trigger for the March 8-9 move," wrote Ashraf Laidi, currency strategist at MG Financial, in a note to clients.

In recent action, the yen was trading near one-month highs vs. the dollar and near six-week highs vs. the euro.

The euro remained supported by expectations that the European Central Bank will hike interest rates to 2.5% from 2.25%, after delivering its first hike in five years in December.

Expectations that the bank may signal further rate hikes this year increased after a report showed that money growth was up 7.6% year on year in the eurozone in January, above expectations for a 7.3% rise.

The dollar, however, rose against the euro despite a report showing new-home sales in the U.S. had dropped more than expected in January. With the housing market representing a pillar of the U.S. economy over the past few years, the report might have cast doubts about how long the

Federal Reserve

will continue to lift U.S. rates.

Meanwhile, stocks were moving higher on Wall Street Monday among a spate of mergers and as crude oil prices dropped sharply. Home improvement specialist


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reported a stronger-than-expected profit and issued bullish guidance, helping investors digest the drop in home sales.


Dow Jones Industrial Average

rose 57 points, or 0.52%, to 11,119. The

S&P 500

gained 0.5% to 1295 and the

Nasdaq Composite

advanced 1% to 2310.


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rose 1.6% after a broker upgraded the stock on confidence it will benefit from chip sales for


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new notebooks.

In the absence of clear signals from Fed officials, the dollar will remain supported, according to Laidi. On Friday, new Fed Chairman Ben Bernanke said little to contradict market expectations that the Fed will continue to hike rates at least one or two more times.

And St. Louis Fed President William Poole said that the Fed is not afraid of raising rates too far, which some fear could lead to a financial accident and/or a pronounced economic slowdown.

"The economy is not fragile," Poole said in a speech Friday, according to


. "There is a great deal of momentum, and should we make a policy mistake, we should be able to back off without a recession developing."

It therefore appears that with Japan now on the bandwagon, all the world's main central banks are on a tightening course.

Perhaps not coincidentally, just as Japan seems poised to lift rates and boost the yen, pressure is intensifying on China to let the yuan move more freely against other currencies. Helped by the artificially low yuan, cheap Chinese exports have undermined the competitiveness of Japanese, European and U.S. exporters.

U.S. Treasury Undersecretary Tim Adams is in China Monday, and is expected to put more pressure on Beijing. Adams is reported to have asked market participants how the currency market would react should the U.S. branded China "a currency manipulator."

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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