Chief economist update: Weaker yen strengthening Japan

Apart from underwriting improved growth in the Japanese economy, the yen's depreciation should help in the Bank of Japan's (BOJ) efforts to bring inflation up to its 2% target.

Look ma, no hands!

"Merkurisumasu, soshite, akemashite omedet?!"

It's a mouthful but this Japanese greeting - according to Google - translates to Merry Christmas and a Happy New Year in english.

It certainly is looking a lot like Christmas in Japan, thanks to the continued depreciation of the yen which, in turn, is thanks to optimism over the "phase one" deal between the US and China and indications from the Markit PMI surveys that the contraction in global manufacturing activity has bottomed.

As such, the VIX index - the fear gauge - has dropped from this year's high of 24.59 in August to a reading of 11.75 overnight. This was around the same time as the yen reached this year's high of ¥105.08 versus the US dollar and €116.08 against the Euro as investors sought cover in the safety of the Japanese currency.

The US dollar has appreciated by 3.9% and the Euro by 3.7% against the yen since, and this comes despite the BOJ not lifting a finger on monetary policy.

Over the past many months, the BOJ has done nothing and it kept policy unchanged at it's October meeting only hours after the US Federal Reserve cut the Fed Funds Rate for a third time in October, following its July and September rate cuts.

The same could be said of the Euro. The European Central Bank's (ECB) September "action" lowered the interest rate on the deposit facility by 10 basis points to -0.50% and announced it would "restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November".

The yen's depreciation comes at a time when the Jibun Bank flash PMI Japan indices for Japan had improved.

The Jibun Bank Japan Composite PMI increased 49.9 in November 2019 from a final 49.1 in the previous month - a reading of 50 delineates expansion from contraction - as the manufacturing sector contracted at a slower pace (48.6 from 48.4 in October) and the services sector climbed back into expansion territory (above 50) to a reading of 50.4 in November from 49.7 in the previous month.

Apart from underwriting improved growth in the Japanese economy, the yen's depreciation should help in the BOJ's efforts to bring inflation up to its 2% target.

With headline CPI inflation at 0.2% (October) and core inflation at 0.4%, continued yen weakness would push import prices up and, in turn, domestic consumer prices.

The optimism behind the yen's descent is evidenced by resurgence in the Nikkei-225 index. It has rallied by 19.8% from this year's low (recorded in January this year) and by 17.1% this year to date.

Read more: BOJBank of JapanCPIEuropean Central BankJibun Bank Japan Composite PMIMarkit PMIMerry ChristmasVIX
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