The Japanese yen was volatile on Tuesday (Jan 23), first weakening after the Bank of Japan (BOJ) maintained its ultra-easy policy settings and then firming after markets picked up signals that an end to its negative interest rate policy was approaching.

After that excitement, however, the yen last traded flat on the day at 148.0 per dollar, having been as weak as 148.6 and as strong as 146.9.

The yen is sensitive to the difference in rates between Japan and other markets, and has shed nearly 5 per cent against the dollar so far this year on the back of markets pushing back expectations of imminent US rate cuts.

While BOJ governor Kazuo Ueda gave no hints on whether the bank would pull short-term Japanese interest rates out of negative territory at its upcoming meetings in March or April, as many economists expect, he did say the likelihood of Japan sustainably achieving the bank’s 2 per cent inflation target was gradually increasing.

He also said many businesses had decided on wages early – Shunto wage negotiations, typically take place in the spring – and that labour unions were asking for higher pay.

“BOJ doesn’t need to wait till Shunto wage negotiations end before assessing whether to normalise policy,” said Christopher Wong, a currency strategist at OCBC.

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“Back-to-back annual wage increases (by a larger magnitude this year) is probably something Japanese officials are hoping to see before making a move. This could well imply that (the) March meeting is live.”

Elsewhere, the euro fell 0.17 per cent to US$1.0865, as European investors digested a survey of eurozone banks for evidence of the extent to which monetary policy tightening has been passed onto the economy.

The poll showed lenders continued to tighten access to credit in the last quarter of 2023 but fewer banks did so than at any point in the previous two years.

“It seems that almost all the transmission from tighter monetary policy to financial conditions has now happened,” said economists at Nomura.

“For some hawks this may be a concern, potentially pushing out when they think rate cuts should happen. However, we think that the majority of (ECB) governing council members are satisfied with the degree of tightening, which has already happened, are pleased that the transmission is slowing down. Hence, we expect cuts from June 2024.”

The European Central Bank meets on Thursday. No change in interest rates is expected but investors will be watching for what it says about its outlook. Market pricing currently shows a reasonable chance of a rate cut by April.

The pound was flat against the dollar at US$1.2713, but did hit its firmest level against the euro since September, at 85.47 pence per euro.

The main British economic news was a smaller-than-expected budget deficit for December, potentially opening up room for tax cuts in a budget scheduled for March.

The dollar index was steady at 103.39.

A report that China is weighing a rescue package for its plunging stock markets helped the yuan and the Australian dollar, which is often viewed as a more liquid proxy for exposure to China.

Chinese authorities are considering a package of measures to stabilise the stock market, Bloomberg News reported on Tuesday, citing people familiar with the matter.

The dollar dipped 0.3 per cent against the offshore yuan to 7.1722 yuan, while the Aussie rose over 0.5 per cent at one point and was last up 0.3 per cent at US$0.6590.

“The (China) news has triggered risk proxies, including the Australian dollar, New Zealand dollar ... higher,” said Wong.

“It remains to be seen if this is just talk, but if it does materialise sooner than later, then risk proxies can trade higher.” REUTERS