Yen weakens to 86.60 overnight whilst the Japanese equity train motors on…

The yen weakened to the lowest since August 2010 amid continued speculation that newly elected Shinzo Abe will exert political influence on the Bank of Japan to inject more cash. 

Japan’s currency dropped 0.5 percent to 86.46 per dollar overnight and the Nikkei 225 index climbed another 0.7 percent to close with the biggest annual gain since 2005. The S&P GSCI Index of 24 commodities added 0.3 percent as oil and copper rose.

Industrial output in Japan declined more than economists expected in November while consumer prices fell, bolstering the case for Prime Minister Shinzo Abe to push for further monetary easing. U.S. congressional leaders plan to meet with President Barack Obama today and House Republicans will convene Dec. 30 as lawmakers seek to avoid more than $600 billion in spending cuts and tax gains that will start in January.

“Policy expectations are behind the continuous decline in the yen,” said Noriaki Murao, managing director of the marketing group in New York at the Bank of Tokyo-Mitsubishi UFJ Ltd. “The Abe administration gives priority to measures against deflation and a stronger yen.”

The yen has now tumbled 15 percent this year, the biggest drop among the 10 developed-market currencies.

Yen Forecasts being revised higher

JPMorgan Chase & Co. revised its yen projections today, saying the currency will fall to 90 against the dollar in the second quarter next year. Its previous estimate was 83. Nomura Holdings Inc. also reduced its forecast to 90 per dollar for the same period from 85.

Government reports today showed Japan’s industrial output slid 1.7 percent last month from October, worse than all 27 estimates in a Bloomberg News survey that had a median forecast of a 0.5 percent decline. Consumer prices excluding fresh food fell 0.1 percent in November from a year earlier.

Abe’s cabinet is working on a plan to fight against a strong yen, the Nikkei newspaper said. Proposals include the use of currency intervention when needed, the paper said.

Finance Minister Taro Aso said he agreed with BOJ Governor Masaaki Shirakawa to strengthen cooperation between the government and the central bank. The BoJ next meets Jan. 21-22.

Given the sharp run in the Japanese market over the last 6 weeks and the long lead to the next meeting of the BoJ on the 21st Jan, we wouldn’t be surprised to see the market consolidate here and for thos readers that took our cue here – http://www.spreadbetmagazine.com/blog/japanese-equities-dont-miss-the-train.html then it’s probably no bad thing to book a profit on a third of the position – we are.

Nikkei 3 month daily chart