BOJ Emergency Meeting Highly

The dollar pared gains against the yen on Thursday after sources familiar with the matter said the Bank of Japan is highly unlikely to hold an emergency meeting later in the day. Rumours had circulated in the market that the BOJ would hold an emergency policy meeting at 2 p.m. local time (0500 GMT) after a media report that the central bank had started considering additional monetary easing steps. The most likely option under consideration is expanding the BOJ's fund-supply tool put in place in December, Japan's Sankei newspaper said, without citing sources. The central bank may either expand the fund supply volume to 30 trillion yen ($352 billion) from 20 trillion yen, or extend the duration of cheap, fixed-rate loans to banks to six months from three months, the paper said. [ID:nTOE67H06U]

The report weighed on the yen somewhat but the overall reaction was limited as investors remained cautious until they see exactly what the authorities might do. "If the BOJ announces only what the report is saying, it is likely to disappoint the market. And there is a possibility that the yen may even appreciate further," said Yuji Saito, director at Credit Agricole's foreign exchange department. The dollar rose 0.2 percent compared with late U.S. trade on Wednesday to 85.65 yen JPY=, trimming gains from day's high at 85.81 yen but holding above a 15-year low of 84.72 yen hit on trading platform EBS last week.

WATCHING THE CENTRAL BANK
Investors are watching whether the Japanese central bank or the government will take new steps to rein in the yen's export-sapping rise ahead of a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa expected next Monday. Japanese Finance Minister Yoshihiko Noda repeated his mantra on Thursday he is continuing to watch foreign exchange moves carefully. Japanese authorities seem unlikely to conduct yen-selling intervention, however, unless the yen's rise accelerates sharply, market players say. The euro slipped after a Spiegel report that austerity steps to fix Greece's debt trouble are damaging its economy but falls in the currency were seen limited as the report provided few fresh incentives. The euro fell 0.3 percent to $1.2809 EUR= and support for the currency is seen at the 100-day moving average at $1.2776, while the upside is heavy around $1.2900, a trader at a Japanese bank said.

The euro was little changed against the Japanese currency at 109.82 yen EURJPY=R, after touching a seven-week low of 109.07 yen on EBS earlier this week. Japanese investors bought a net 2.18 trillion yen ($25.6 billion) of foreign debt in the August 8-14 week, the largest volume of purchases since the finance ministry started to gather its weekly capital flows data in January 2005. [JP/CAP] Japanese investors have been net buyers of foreign bonds for 14 straight weeks, picking up 14.52 trillion yen ($170.2 billion). Japanese have bought a net 16.37 trillion of overseas debt so far this year, already exceeding last year's total net buying of 12.13 trillion yen.

A source familiar with the data said Japanese banks have been aggressively buying overseas debt, boosting the net buying figure. But banks' hefty purchases of foreign bonds are not seen helping to rein in recent gains in the yen because banks hedge against foreign exchange volatility when they buy bonds abroad or raise funds overseas to finance their purchases, the source said. Banks' buying of U.S. government debt is likely to have contributed to a fall in Treasury yields and actually to have been more of a negative factor for dollar/yen, some analysts say. The pair's moves have recently had a strong correlation with U.S.-Japanese government bond yield spreads, which have narrowed as U.S. treasury yields fell sharply over the past few months.