Yen Jumps After Economic Downgrade, Taking Dollar Higher

The Japanese yen surges sharply in Asian session today after the government downgraded the economic outlook for the first time and ten months. In the cabinet office's monthly report, the government note that "weak movements have been seen recently" even though the economy is still expected to be "on the way to recovery at a moderate pace." In particular, view on exports was changed to "weakening" from "picking up." And the reported cited an risks of "further slowing down of overseas economies and sharp fluctuations in the financial and capital markets."

Views on personal consumption, home-building, imports and industrial production were also lowered, but the labor market outlook has somewhat showed "signs of improvement." USD/JPY looks set to take on last week's low of 78.33 today and might now be extending the fall fro 79.65 towards 77.66/90 support zone. Weakness in yen crosses also dragged major currencies down against dollar, in particular with AUD/USD extending last week's fall to 1.0350.

Ahead of the highly anticipated Jackson Hole symposium later this week, Chicago Fed Evans continued his push for additional easing. Evans noted at a seminar in Hong Kong that Fed shouldn't be in a wait-and-see mode and is already "past the threshold for additional action." He urged Fed to "take that action now."

He emphasized that "clear and steady progress toward stronger growth is essential" but he's not seeing that yet. He thought the current policy won't be able to bring down unemployment rate, which he believe could go below 7% before 2015 at least. He, thus, supports an open-ended bond-buying program which would only stop after two or three quarters of steady fall in unemployment rate, or when inflation jumps above 3%.

Cleveland Fed Pianalto also said that current recovery is "frustratingly slow" and "large-scale asset purchases can be effective." But she also noted that "it is possible that future large-scale asset purchase programs will yield somewhat smaller interest-rate declines than past programs." And, "it is conceivable that, at some point, policies designed to promote further declines in rates could interfere with financial stability." She didn't present a clear position to us.

Dallas Fed Fisher said he solicited a paper titled "Ultra Easy Monetary Policy and the Law of Unintended Consequences" from William White, a "former Bank for International Settlements head economist. A few key points of the paper could be found in the summary in page 5 and 6. Firstly, "monetary stimulus operating through traditional channels might now be less effective in stimulating aggregate demand than is commonly asserted" and "cumulative effects provide negative feedback mechanisms that also weaken growth over time."

Secondly, "easy monetary policies threaten the health of financial institutions and the functioning of financial market." Thirdly, "ultra easy monetary policy" would "buy time to pursue other policies that could have more desirable outcomes." But there is danger that such polices are " wrongly judged as being sufficient" And the "bought time would in fact have been wasted."

In Europe, ECB executive board member Asmussen, who's also a former German deputy finance minister, assured ECB will "act within the framework of our mandate" regarding the new bong buying program. And the details could be released on September 6 ECB meeting. But he also noted that under the framework of the new bond-buying program, "ECB will only buy bonds with short maturities."

Meanwhile, Asmussen also warned of not repeating the "mistakes with Italy" last summer, when ECB bought Italian bonds but "the time was unfortunately not used for necessary adjustment measures." Separately, German Finance Minister Wolfgang Schaeuble and French Finance Minister Pierre Moscovic announced that they have created a joint working group focusing on development of a banking union and promotion of stability in the Eurozone.

On the data front, German Gfk consumer sentiment, Eurozone M3 money supply and Swiss UBS consumption indicator will be released in European session. Meanwhile, S&P Case-Shiller 20 cities house price and consumer confidence will be released from US.