Chief economist update: The yen to dictate if BOJ turns words into action

"Actions speak louder than words."

That may be so but it appears that this generally accepted truism does not apply to the Bank of Japan (BOJ).

The Japanese central bank has kept monetary on hold since it introduced quantitative and qualitative easing (QQE) with negative interest rates (in January 2016) and expanded further to "with yield curve control" in September of the same year.

Since then, it's let its mouth do the policy adjusting - or in the vernacular, verbal intervention. It did it again at its October meeting - it kept monetary policy settings unchanged while at the same time stating that: "The bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost."

The BOJ's decision came hours after the US Federal Reserve cut the fed funds rate for a third time in October, following its July and September rate cuts.

But instead of depreciating against the yen, the US dollar had been appreciating against the yen since late August.

The same could be said of the euro, despite the European Central Bank's (ECB) September "action" to lower the interest rate on the deposit facility by 10 basis points to -0.5% and announcement to "restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from November 1."

The US dollar has appreciated by 3.8% versus the Japanese yen since this year's September low and the euro has gained 4% over the same period.

This is counter-intuitive given the comparative monetary policy settings between the US and Japan and the Eurozone and Japan.

However, it could be that recent positive reports over the US-China trade negotiations may have reduced safe-haven buying of the Japanese yen.

This would be a godsend for the BOJ. More so, given the latest indications from its purchasing managers' indices.

The Jibun Bank Japan PMI indices all dropped into contraction territory - below 50 - in October. The composite PMI fell to a reading of 49.1 in October from 51.5 in the previous month due to the continued weakness in the manufacturing sector (down to 48.4 from 48.9 in September) and the first contraction in the services sector (down to 49.7 from 52.8) since September 2016.

So far so good, the BOJ is, in Bruce Lee's words, fighting (the currency war) without fighting.

The yen's recent depreciation should help support Japan's economic growth and inflation over the coming months but only if it becomes persistent.

Else, the BOJ would need to back up its words with concrete action.

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