LONDON: Foreign exchange markets may be underestimating the temptation for the Bank of Japan to unveil on Wednesday new monetary easing measures that would weaken the yen .
The chances of action have risen since Thursday's announcement of new large-scale asset purchases by the US Federal Reserve drove the yen to a seven-month high against the greenback.
Japanese Finance Minister Jun Azumi's displeasure at the yen's rise was clear on Friday as he re-iterated that Japan stood ready to take decisive action against "excessive moves" in the value of the local currency.
Azumi said the BOJ should respond to the current economic situation as appropriate, a call which was surely an invitation to the independent central bank to act on Wednesday.
The BOJ should act sooner rather than later, even though it will not have its tankan report on the mood of manufacturers, which is due only at the start of October.
The major catalyst for action should be the renewed deterioration in the Japanese economic outlook.
BOJ board member Ryuzo Miyao said on Sept 5 that the central bank will keep scrutinising the outlook for the Japanese economy and stands ready to act to support it if needed.
That moment is now.
The outlook was uninspiring even before an upsurge in tensions between China and Japan over disputed ownership of islands in the East China Sea.
Japanese employers, seeing disruption to their operations in China, are unlikely to be in an optimistic frame of mind as they fill in their tankan questionnaires.
Aside from that, "Japan's economic recovery appears to be pausing due to the global slowdown," the government said on Friday in its monthly report for September.
That was the second cut in successive months in the government's assessment. No wonder Economics Minister Motohisa Furukawa called on Friday for the government and the central bank to work as one.
"Overseas developments must be taken into account in guiding economic policy, including monetary policy," Furukawa told a news conference.
There is a theme here.
"When there is strong uncertainty over the overseas economic outlook, we are more mindful of the potential damage of a strong yen," BOJ Governor Masaaki Shirakawa had said on Sept 6.
If Shirakawa was looking for camouflage to justify BOJ action, he could cite International Monetary Fund Deputy Director Naoyuki Shinohara, who said on Thursday there was room for the BOJ to ease policy further.
The market may also be underestimating how the views of some BOJ policymakers have evolved since their August policy meeting.
New BOJ board members Takahide Kiuchi and Takehiro Sato, whose first policy meeting was on Aug 8-9, may make their presence more firmly felt. Both had earlier called for policymakers to take new and bolder steps.
Finally, former BOJ deputy governor Kazumasa Iwata's call for further monetary easing may carry more force than some expect. He is seen as a strong candidate to succeed Governor Shirakawa when the latter's term ends next April.
Much has changed in the central bank world, since the BOJ's August meeting. The risk in the foreign exchange market is that the yen slides as the BOJ surprises with additional easing measures on Wednesday.
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