Abe Win Boosts Stimulus Hopes As Yen Crashes

Shinzo Abe (Image via World Economic Forum / Flickr)

The results of the Japanese Upper House election this weekend saw Prime Minister Shinzo Abe retaining his majority whilst also increasing his seating from 135 to 145 out of a possible 242.  This result presents a renewal of Abe’s mandate to further pursue Abenomics and enacts more fiscal stimulus. Regarding the issue of changing the constitution, the PM’s party and also other political parties in favour of changing the constitution, achieved 2/3 of the seating meaning that Abe now can change Japan’s pacifist constitution provided he holds a referendum and gets approval from the public.

Abe Win Gives Green Light To Further Stimulus

The result was interpreted by markets as JPY bearish as with a majority confirmed once again; Abe now has a green light to continue with the fiscal stimulus for which he is renowned. Speaking at a press conference after his victory Abe announced that the Japanese Government “are going to make a bold investment into seeds of future growth.” Market expectation for fiscal stimulus is currently at around 10trln JPY with spending to be focused on public investment for industries such as tourism, robotics, elderly care and infrastructure and other projects such as shopping vouchers to fuel consumption. All of this is in a view to achieving Abe’s goal of increasing nominal GDP from roughly 500trln JPY to 600trln JPY by 2020.  However, the market impact of this fiscal stimulus is likely to be limited since discussions have been ongoing regarding the matter for months now.

The key focus for markets will be on the upcoming Bank of Japan meeting ( July 29^th) with markets keen to see if the BOJ will break out of its “wait and see” mode. Despite three phases of QQE (Quantitative & Qualitative Easing) Japanese Inflation is still negative with recent data showing three consecutive months of falling CPI alongside steadily declining inflation expectations. Amidst this environment of increasingly negative inflation and subdued inflation expectations, JPY has actually appreciated nearly 20% this year, with positioning flipping to bullish for the first time since 2012.

 

 

Global Challenges

One of the biggest issues facing Abenomics is that for it to be successful and deliver Japan out of deflation, it requires stability in the global environment particularly in Europe & the US Given the current climate, both these regions are in a state of flux with Europe rocked by the UK’s Brexit move and similarly the US governed by fluctuating rate hike expectations in the wake of a new phase of global volatility.  The Fed’s Dovish reaction to Brexit thus far works against Abenomics by keeping the Yen supported.  If The Fed can raise rates by year end, this should push Japan into the reflationary mode.  The next Fed meeting will be of key concern to the BOJ and should the Fed turn yet more Dovish still; this would likely deter Japan from intervening in the FX market.

JPY weakened sharply yesterday on reports that Ben Bernanke, former Fed Chairman, visited Japan to meet with BOJ Governor Kuroda prompting rumours that the meeting was concerning potential further stimulus options such as “helicopter money”. Expectations continue to build around what action the BOJ is likely to take at its upcoming meeting.

The last time USDJPY moved the way it has over the last 24hrs was Oct 2014 before Kuroda announced the second phase of QQE, suggesting that some players were expecting new measures to be announced immediately. However, at a press conference today, expectations were cooled slightly as officials noted that they did not yet know the size of any stimulus spending to come and that full measures would be compiled by the end of July.

With such a dismissive market reaction seen in January in response to the BOJ’s historic move into negative rates, the BOJ will be keen to avoid any further JPY appreciation. Attention now turns to the BOJ’s end of July meeting.

Looking Ahead

Tomorrow the Bank of Canada meets for its July rates decision and updating of its quarterly economic forecasts. Whilst markets are not expecting rates move this time around it will be interesting to hear if there is any departure from the bank’s recent neutral tone. Recent economic data sets have continued to underperform with non-commodity exports down 2% in May alongside Canada’s second largest trade deficit and weaker-than-expected consumption.

 

 

These data sets alongside the wildfires which have plagued the country’s Oil regions this year suggest a contraction in growth over 2Q.  With the global outlook having also darkened in the wake of Brexit this meeting could provide the opportunity for the BOC to change tact slightly, however, with Oil prices continuing to push higher we can expect to see some upward revisions at least to the medium-term growth and inflation forecasts.