Yen Selling Resumes After Cabinet Approved JPY 880b Stimulus

Fresh selling was seen in the Japanese yen before the month closes. The Japanese cabinet approved a JPY 880b stimulus package today, more than double of an earlier package announced back in October. The package includes JPY 132b for nursing homes, JPY 110b for jobs, JPY 95b for small business financing. Also, it will cover relief work and projects following the natural disaster in 2011. The cabinet expected the package to raise Japan's GDP by over 0.2% and create around 80,000 jobs. Reserve funds would be used to fund the stimulus instead of issuing new debts.

But the main driving force behind yen's weakness is still expectation on BoJ easing. According to Nikkei newspaper's report, opposition LDP had an approval rating of 23%, much stronger than ruling DPJ's 13%, and that affirmed LDP's leader Shinzo Abe's chance of becoming the next prime minister after December 16 election. Abe reiterated yesterday his call for BoJ to inject unlimited cash until inflation reaches 2%. In Japan, data released suggested the world's third largest economy remained in trouble.

Core inflation was flat yoy in October, up from -0.1% in the prior month. However, Tokyo's core CPI for November contracted -0.5% yoy, suggesting deflation continued to be a problem. Unemployment rate stayed at 4.2% in October. Household spending contracted -0.1%, following a -0.9% drop in the prior month while industrial production gained 1.8% mom in October, compared with consensus of -1.8% and -4.1% in September.

In US, it's unlikely that the government would hammer out a plan before Christmas to avoid the fiscal cliff problem. House of Representatives Speaker John Boehner replaced his optimistic tone with disappointment at the lack of progress made in fiscal cliff talks with Treasury Secretary Geithner. According to Boehner, "based on where we stand today I would say two things.

First, despite the claims that the president supports a balanced approach, the Democrats have yet to get serious about real spending cuts…And secondly, no substantive progress has been made in the talks between the White House and the House over the last two weeks." On the other hand, Senate Majority Leader Harry Reid said he was still waiting for a "serious offer" from the Republicans while House Minority Leader Nancy Pelosi criticized that that Boehner's comments were political "tactics" as she defended the Democrats had voted for spending cut and knew that it's necessary.

In Europe, German's Bundestag lower house is expected to approve the fresh bailout for Greece today. Finance Minister Wolfgang Schaeuble said that "we are trying to keep the costs and risks (of aid to Greece) as small as possible. We are just following the old rule of 'step by step'". Meanwhile, Bundesbank chief Jens Weidmann warned that "if Greece does not implement the agreed reforms and does not manage to put its budget on a solid footing, the effect of the new (aid) measures will evaporate."

Looking ahead, Swiss KOF leading indicator and Eurozone CPI and unemployment will be the main feature in European session. From US, personal income and spending are expected to rise 0.2% in November. PCE deflator is expected to rise to 1.8% yoy in October while core PCE is expected to be unchanged at 1.7% yoy. Chicago PMI is expected to rise back to 51.2 in November.