Japan: Monetary & fiscal stimulus not likely to restore confidence in Abenomics - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the yen has rebounded sharply in the wake of policy announcements from both the BoJ and the government with USD/JPY having nearly fully retraced the rebound from the post-Brexit low of 100.31 set on 11th July.

Key Quotes

“From an intra-day high of 107.49 on 21st July, USD/JPY fell to a low of 100.68 this week. Clearly, the initial reaction reflects a lack of confidence in these policy steps having any lasting impact on the economy and inflation. Is the initial market reaction reasonable?

USD/JPY at the current level just above 101 is perhaps a reasonable reflection of policy developments if the spike to 107 on ‘helicopter money’ speculation is ignored.

So with that in mind, we should not simply dismiss the fiscal stimulus package out of hand. Indeed, the total real money spending when you drill down into the JPY 28.1trn total is still meaningful with JPY 13.5trn of ‘fiscal measures’

So from a growth perspective and the potential for this fiscal package playing a role in closing the output gap and lifting inflation, the measures judging from the BoJ forecasts will ensure real GDP growth remains a bit above potential this fiscal year.

The updated real GDP projections from the BoJ last week showed an estimate for this fiscal year of 1.0%, down from the 1.2% estimate made in April but incorporating an assumption of a fiscal stimulus package. Given PM Abe’s objective of lifting nominal GDP by 20% to JPY 600trn by 2020, the impact this fiscal stimulus package will have on that will be relatively small. So the limited reaction of the yen (from postBrexit low in July) to the fiscal package seems reasonable to us.”