* BOJ bold easing hopes may be in for disappointment
* Demand for yen call options up on BOJ policy doubts
* Abe may be seeking exit strategy - analyst
By Hideyuki Sano
TOKYO, Feb 26 Sharp yen gains sparked by fears
of political deadlock in Italy are a wake-up call to investors
and a challenge to Prime Minister Shinzo Abe, whose demand for
drastic monetary easing has sent the Japanese currency tumbling.
Abe won a big election victory in December promising
aggressive policies to end deflation and revive economic growth.
The fall in the yen has begun to help exporters.
But Monday's sudden spike in the yen was a reminder Japan is
seen by many investors as a safe haven in times of uncertainty,
which will limit the impact of Japan's monetary policy easing on
the currency. Some investors also say the Bank of Japan will
struggle to live up to expectations of bold new stimulus.
Japanese officials remained silent on Tuesday on the yen
spike in the wake of elections in Italy that showed no group had
a clear majority in parliament, an uncertainty resurrecting
fresh euro zone debt fears for investors.
Some analysts said there was little the Japanese government
or the Bank of Japan could do.
"Many market participants are expecting bold monetary easing
from the BOJ but such expectations could turn out to be an
illusion," said Soichiro Monji, chief strategist at Daiwa SB
The yen had its biggest daily gain against the dollar and
the euro since May 2010 on Monday, with the euro falling a
whopping 5 percent in six hours to a one-month low of 118.74 yen
. The dollar fell to as low as 90.85 yen from a
33-month high of 94.77 yen.
That was the yen's first major gain since a steep decline
that began in November, when Abe called for dramatic monetary
easing while he was the opposition leader.
The Japanese currency has dropped as much as 16 percent
versus the dollar and 21 percent against the euro since then. At
the same time, Japanese stocks have surged 27 percent.
In a sign of growing scepticism about Abe's policies, dubbed
"Abenomics", some investors have begun buying yen call options,
the right to buy yen at a pre-determined price, often a strategy
to hedge against a potential rise in the currency.
The dollar/yen's risk reversal spreads show
that in the past week or so yen call options became more
expensive than yen put options, which give the right to sell the
yen, for the first time in almost six months.
"We have tended to view developments at the BOJ as too much
talk and not enough action," said Robert Rennie, chief currency
strategist at Westpac Bank in Sydney, who made a recommendation
to buy yen calls on Feb. 13.
Abe and other Japanese ministers sought to talk down the yen
earlier this month but analysts noted they went quiet after a
meeting of financial leaders from the Group of 20 industrial
nations in Moscow.
Although a G20 statement did not single out Japan as trying
to weaken the yen to gain a competitive edge, many analysts
think pressure was put on Tokyo to avoid verbal intervention.
"It's becoming clear that they can no longer keep trying to
talk down the yen as they used to, given what other countries
are saying about the yen's decline," said Daisuke Uno, chief
strategist at Sumitomo Mitsui Bank.
Japan has denied it was trying to weaken the yen, saying all
it wanted was to ease monetary policy to end deflation.
TIME FOR ACTION
Many investors are waiting for the appointment of a new
governor at the BOJ after the current chief, Masaaki Shirakawa,
steps down next month.
Abe is expected to nominate Haruhiko Kuroda, head of the
Asian Development Bank and an advocate of aggressive easing.
That would mean the bank's first policy review under Kuroda
would take place on April 3-4.
Kuroda has long criticised the BOJ as too slow to expand
stimulus, and is expected to push for more radical efforts to
achieve a 2 percent inflation target set in January.
Some analysts say the BOJ might disappoint.
Westpac's Rennie said the BOJ would need to triple its
planned asset purchases this year of about 36 trillion yen if it
just wanted the pace of its balance sheet expansion to match
that of the U.S. Federal Reserve.
"That can be done either through an intense lengthening of
the maturity of assets being purchased or through increased
monthly purchases. Either way, huge expectations have been built
into the yen. I am just not sure that the BOJ can live up to
those expectations," he said.
Abe has also toned down his comments on a plan to set up a
fund to buy foreign bonds, saying last week the need for such a
body had declined.
"It appears that Abe is already seeking an exit strategy for
his plan. He praised the BOJ for taking bold steps when the BOJ
adopted inflation-targeting. For him, bold easing is probably
already in place," Monji said.