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Yen slides to seven-year low after surprise BOJ policy easing

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[October 31, 2014]  By Anirban Nag

LONDON (Reuters) - The yen tumbled to its lowest level in nearly seven years against the dollar on Friday, putting it on track for its biggest losses in 18 months, after the Bank of Japan shocked markets by unexpectedly easing policy further.

In a pre-emptive move to combat risks of deflation, the BoJ unleashed another round of quantitative easing. It raised its monetary base target to an annual increase of 80 trillion yen ($724.5 billion) from 60-70 trillion yen and tripled its purchase of risk assets such as exchange traded funds (ETFs) and real estate investment trusts (REITs).

While some in the market had expected some easing, most had thought any additional action was months away as Governor Haruhiko Kuroda had voiced optimism over the Japanese economic outlook even after soft data.

As a result, the dollar surged past its Oct. 1 high of 110.09 yen, rising as far as 111.89 yen,  its highest level since January 2008. It has climbed 2.4 percent on the day, on course for its biggest gain since April last year.

"It is a bit of a Halloween shocker for the markets," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "Along with the reallocation by the pension fund, it is a double whammy for the yen."
 


A Japanese government panel overseeing the giant Government Pension Investment Fund (GPIF) approved plans for the fund to raise its holding of foreign stocks to 25 percent of its portfolio from 12 percent.

Gareth Berry, a currency analyst with UBS, said both these measures are likely to propel dollar/yen higher, taking the pair closer to their three-month forecast of 115 yen.

"We doubt it would escape investor attention that, with the BoJ buying at a faster pace with near-immediate effect, an early start to GPIF diversification could be more likely," he wrote.

CURRENCY WARS

Analysts said the move by the BoJ is likely to put more pressure on the European Central Bank to ease policy as well. Both central banks want to boost inflation, and cheapening their currencies by flooding markets through massive asset purchases is one of the ways to encourage growth and bolster prices.

Paul Mackel, head of Asian currency research at HSBC, said the BoJ's move would intensify currency wars, especially given the risk ECB easing is on the cards.

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"With other central banks continuing to loosen policy and put downward pressure on their currencies, we believe that the dollar will increasingly have to shoulder the burden of appreciation," he said in a note.

Data on Friday showed annual inflation in the euro zone rose in line with expectations in October, providing some relief but doing nothing to alter expectations that the ECB could still ease policy in coming months.

The euro jumped to a six-week high against the yen of 140.65 yen after the euro zone inflation. It also pared losses against the dollar, but was still down on the day. It was last down 0.3 percent lower at $1.2580, with bears targeting the Oct. 3 low of $1.2500.

The drop came as German retail sales posted their biggest monthly decline in more than seven years in September, data showed on Friday.

The dollar index climbed as far as 86.736 -- a high last seen on Oct. 6, approaching a four-year high -- as the greenback also benefited from upbeat U.S. growth figures published on Thursday.

The world's largest economy grew at an annual pace of 3.5 percent in the third quarter, beating a forecast of 3.0 percent. Earlier this week the Fed sounded more optimistic about a recovery, prompting investors to bring forward chances of when the central bank will start to hike rates.

(Additional reporting by Shinichi Saoshiro and Hideyuki Sano; Editing by Catherine Evans)

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