JPY: Abe Expected to Unveil a Larger Liscal Program - BBH
Research Team at BBH, notes that at the last G20 meeting, Japan may have
been questioned about its unexpected rate cut at the end of January.
“There was caution repeated (the fact that the G20 has said it before suggests no need for a secret agreement about it) about over-reliance on monetary policy. Japan will go to this G7 meeting with the Diet having approved a JPY778 bln earthquake relief and reconstruction bill, which Abe later is expected to unveil, is part of a larger fiscal program.
After seeing the strength of the consumption component of the better than expected Q1 GDP, some observers think it may be difficult for Abe to postpone the retail sales tax increase, due next April. We are less convinced. The sales tax increase is poor politics and poor economics. Despite Q1's upside surprise, when struggling to grow on a sustained basis, why tax the component that drives 60% of it? Postponing the tax increase would also not likely cost Abe or the LDP a single vote in the July election.
What was resistance should now act as support for the dollar. Provided the JPY109.30-JPY109.65 area holds, the dollar can retest the highs seen before the BOJ kept policy unchanged at the end of April, which are located in the JPY111.80-112.00 area. We note that the US premium over Japan on 10-year money widened 7 bp yesterday to 194 bp, and is 14 bp fatter on the week.”