Yen Rallies As Fukui Focused on ZIRP

Talking Points<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

·          BOJ Minutes Hawkish 

·          <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Fukui unaffected by scandal

·          German PPI shows inflation contained

·          US Housing key focus

Less than 24 hours after coming under assault from the twin pressures of NK missile launch crisis and the threat of Governor Fukuis forced resignation, the yen bounced back with a vengeance in Asian and early European trade advancing nearly 100 points off the lows set yesterday. The BOJ policy minutes ignited the yen rally in Asian trading when they revealed that members were concerned about the overly simulative nature  of ZIRP. Governor <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Fukui then added to the speculation that ZIRP will be lifted sooner rather later by stating that the policy should be adjusted without delay, though must be done gradually. Mr. Fukuis political fortunes improved as well when Shinzo Abe, the Japanese government spokesman and man most likely to succeed Prime Minister Koizumi, reaffirmed his support for the Governor.  For his part, Governor Fukui stated that he regrets holding on to his investment with Yoshiaki Murakami, the fund manager arrested on insider trading charges, after becoming head of the central bank. Fukui added that he will hold a press conference on the issue later today, hopefully putting the matter to rest.

After several days of confusion and indecision over the matter, it appears that Japanese policy makers have decided that Governor Fukuis departure would be far more detrimental to the heath and stability of the Japanese economy than the political repercussions  of  his involvement in the Murakami affair. The issue has not been definitively settled, but with the Diet in recess and unlikely to make any immediate moves,  Governor Fukui seems to have weathered the worst of the crisis.

From an FX perspective we believe that Governor Fukui should be taken at his word. Namely that ZIRP will be lifted - at the latest by August - however, the pace of rate hikes is likely to be gradual, some may even say glacial as Japanese policy makers will err on the side of caution and will institute a sharply restrictive monetary regime for fear of triggering yet another slowdown in Japanese economy. In short the initial move away from ZIRP will be more of a symbolic rather than a fundamental shift in monetary policy.      <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

FX Upcoming