Optimism abounds over the structural reforms advocated by Prime Minister Junichiro Koizumi.

With expectations running high ahead of the imminent Tokyo Metropolitan Assembly election and the Upper House election — which is expected to take place in late July — the yen has gained ground against the dollar and the euro of late.

Indeed, a broad outline of structural reform measures worked out by a government economic and fiscal policy panel can be viewed in a positive light.

The panel made public its “big-boned” policy outline last week, citing the need to revamp the ineffective allocation of budget resources and push, instead, for measures aimed at exploiting long-term economic growth potential.

Yet, the reform program will no doubt result in greater unemployment and hit domestic demand, intensifying deflationary pressure on the economy.

But even if the reform program hits a snag, the possible failures of the proposed policy measures may not materialize discernibly at least until after the fall.

At present, few market participants are worried about a possible deflationary impact.

Another major factor behind the yen’s strength in recent weeks has been the weakness of the euro.

The single European currency has taken a battering, prompting market participants to buy yen in order to adjust their oversold yen positions. This is despite the fact that Japan’s economic fundamentals provide few reasons to buy yen.

But with speculative dealers no longer in a mood to sell yen short and Japanese institutional investors applying the brakes on purchases of foreign securities, the yen has tended to rise.

Another major factor affecting the yen’s value in recent months has been volatility of Tokyo share prices.

Until recently, an upturn in New York share prices has often enticed foreign investors to build their Japanese portfolios, while their increased purchases of Japanese stocks have helped shore up the yen.

The yen has often moved higher in inverse proportion to falls in Tokyo stock prices.

Conversely, there appears to be a good chance that the yen’s strength will run out of steam, triggering selloffs on the Tokyo stock market.

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