Weaker yen rekindles Japanese equity fund inflows

The Bank of Japan on Friday rejected the idea of an imminent injection of further monetary stimulus into the economy, amid growing evidence of the favourable impact of a weakened yen on Japanese companies.

Ahead of next week's BoJ monetary policy meeting, governor Haruhiko Kuroda said there was a steady improvement in inflation as the economy picks up, and the bank was sticking to a two-year timescale for reaching its 2 per cent inflation target.

"I therefore don't think additional monetary easing is necessary at this stage," he said.

The dollar-yen exchange remained in the Y118-Y120 range it has settled into since early February. But the yen is rekindling traders' interest, as the impact of "Abenomics" and monetary easing plays well with Japanese exporters.

The Nikkei 225 index, which rose 0.8 per cent on Friday, has risen 13 per cent in both yen and dollar terms in the year to date, while yen-denominated flows into Japanese equity funds reached their highest level since the second quarter of last year.

EPFR Global, which tracks fund flows, said investors were "attracted by the clarity of [Japan's] current economic policies and the valuations of Japanese stocks".

Steven Englander, head of G10 FX strategy at Citigroup, said the yen had "fallen off the reserve manager radar screen", but was attractive because of the size of its fall - down by a third against the dollar since 2010.

"This does not mean that it cannot go lower, but its valuation already incorporates two rounds of quantitative easing, lowering of inflation forecasts, some disappointment in the economic impact of these policy moves and asset reallocation by Japanese asset managers," said Mr Englander.

However, HSBC said it still expected further easing from the BoJ this year, pointing to further weakness in the yen. Its currency strategists revised their expectations for dollar-yen at the end of the year from Y128 to Y125.

The dollar gained some support after another bruising week that saw it dip to a three-month low as lacklustre data continued to weigh on the prospects of a US rate rise.

Friday's session took the dollar index - which measures the greenback against its peers - to 93.823, up 0.3 per cent.

The euro hit $1.4445 on Thursday, its highest level since February 19 amid signs of better economic health among eurozone members, but was pulled back a cent lower in Friday trading.

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