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PM Bulletin

It has been a rollercoaster ride for yen traders over the past few days. Of course they should be used to big moves given the volatility of any FX pair which includes the Japanese currency. Thanks to Japan’s low interest rates and the yen’s liquidity, the yen is a main component of the carry-trade. This is where investors sell (borrow) a low-yielding currency and use the proceeds to buy higher-yielding (and riskier) assets. Obviously, when risk appetite diminishes, this trade gets unwound – often very quickly. On top of this, Japan has for many years fought to drive its currency lower. The main reason used to be in order to keep its exports competitive and so boost growth. But now it has the additional motivation of trying to fight off the deflationary pressures which continue to weigh on the economy and are such a burden given the country’s high levels of government debt. Recent yen strength (despite unprecedentedly large dollops of fiscal and monetary stimulus) which saw the USDJPY drop below 100 recently, must be keeping Japan’s policymakers’ awake at nights.

This morning the yen slumped after Japanese Prime Minister Shinzo Abe announced that his government was preparing a fiscal stimulus package worth 28 trillion yen ($265 billion). The news saw the USDJPY top 106.50. Yet just 24 hours earlier the pair had dipped below 104.00 after the Nikkei Business Daily reported that the government was preparing to inject just 6 trillion yen ($57 billion) into the economy over the next few years. Bear in mind that just over a fortnight ago the ruling Liberal Democratic Party won a sweeping electoral victory in the upper house. This was seen as a validation Prime Minister Shinzo Abe’s profligate economic strategy and Mr Abe quickly followed this up with the promise of a 10 trillion yen ($95 billion) package for infrastructure spending. Then by the end of last week there were whispers that this could go as high as 20 trillion yen ($190 billion).

So now we know that the planned fiscal stimulus package is 28 trillion yen, although this now goes before the Cabinet next week for approval. What we don’t know is how much of this package is new spending and how much is already priced in. But in telling the world about it today, Shinzo Abe is really throwing down the gauntlet to the Bank of Japan. The question now is how Governor Kuroda and his colleagues at the BOJ will respond. The consensus expectation is that the Japanese central bank is preparing to unleash a fresh round of monetary stimulus. If so, this would be the first time the BOJ has loosened monetary policy since it adopted negative interest rates at the end of January this year. But what form will this stimulus may take, and will it be enough to keep investors happy? I’ll go over some of the possibilities in tomorrow’s PM commentary.

David: What we don’t know is how much of this package is new spending and how much is already priced in.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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