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Japan: Macro funds and real money remain buyers of US dollar below 120 mark

Asian equities saw a bounce-back from yesterday’s heavy losses with the Nikkei 225 (+2.5%) outperforming and reclaiming the 17,000 level aiding investor sentiment. In fact, a second consecutive month contraction in Japan’s industrial production and dreadfully inert retail sales in August revived expectation that the BoJ may add further stimulus to avoid deflation from deepening.

BoJ however announced to cut its monthly purchases of floating rate government bonds from 140 billion to 120 billion yen, while leaving the purchases of other maturities unchanged. As the Japanese pensions funds are now shifting from government bonds to local equities, worries about the quantity of JGBs available for BoJ purchases decline.

The yen continues seeing demand in Japan as the month/quarter end and Japan’s fiscal year half end demand prevented the USDJPY from picking up momentum on the upside. The sentiment is marginally positive with resistance presumed at 120.55/75 (daily Ichimoku cloud cover). A renewed USDJPY hike is possibly on the cards. The downside risk is the subdued US yields which could jeopardise gains on the USD leg. With increasing expectation of a further BoJ stimulus, macro funds and real money remain buyers below 120 mark.