Japan is preparing for a near-term end to the Bank of Japan's (BoJ) ultra-easy monetary policy today after key government officials appeared to endorse a move.
Government bond yields hit new five-year highs - back to levels before the BoJ started its policy of flooding the banking system with huge amounts of money in March 2001 - while the yen rose to a one-month high against the dollar and a six-week peak versus the euro.
Following hawkish comments by senior BoJ officials last week, Prime Minister Junichiro Koizumi sounded more resigned than ever to a policy shift despite worries that an eventual rise in interest rates may hamper government efforts to trim state debt.
"What measures are needed is something that the BoJ will determine, in line with the government and BoJ's mandate of overcoming deflation," he said.
Yesterday economics minister Kaoru Yosano gave his strongest endorsement yet to a policy shift, saying the BoJ should feel free to end its so-called quantitative easing policy once conditions for a move are met.
The BoJ policy has seen it flooding the banking system with excess cash and pinning money market rates near zero in an attempt to encourage economic activity and beat deflation. It has vowed to continue until the core consumer price index shows consistent year-on-year rises.
A 0.1 per cent gain in December core CPI, which excludes fresh food prices, and expectations for a 0.4 per cent jump in January, have bolstered expectations for a policy shift in April, while some in the market are peculating on a move as early as the
BoJ's March 8th-9th meeting. Apart from steady gains in CPI, the BoJ has said there must be no risk of deflation returning and trends in prices and the economy must allow for a policy change.