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PY: Weakness Could be Fleeting Depending on Details
USD/JPY pushed higher today after Kyodo News reported that PM Abe has agreed a fiscal stimulus package of over JPY 28trn. USD/JPY had already been drifting higher during the Asian trading session on BoJ easing speculation but then between 0350-0400 BST, USD/JPY spiked notably as news of the fiscal stimulus package broke. This news came just after a story from Dow Jones reporting that the government would announce a 50-year JGB plan in the coming days.
This looks very much like the market quickly put two-and-two together and came up with a very appealing answer – the government was moving toward specifically issuing longer-term debt to finance some larger than expected stimulus plan.
Firstly, the 50-year JGB plan has been denied while secondly we should remain wary of the fiscal stimulus package being much more than what was already expected by the markets. The larger than expected size might well be down to add-ons that do not relate to actual fresh stimulus spending. Kyodo News reports that JPY 13trn of the package will be funds made available for low interest bearing loans. We have already had news reports in recent days suggesting that the actual amount of new fiscal spending could be JPY 3-6trn with the larger total possibly spread over two fiscal years. If that’s the case, that sized package is already within market expectations and hence could disappoint current higher expectations.
The yen is also weaker with the Nikkei reporting that the BoJ was considering numerous options on easing its monetary stance at the meeting tomorrow and Friday. We’ve also been here before but no doubt given Governor Kuroda’s history of surprising the markets, it is likely that easing speculation will remain very high going into this meeting.
Our view remains unchanged – we believe the BoJ will wait for government fiscal stimulus details to be released and perhaps for other Abenomics policies to be announced before implementing monetary easing. With so few options available to the BoJ, it will remain very cautious over using up available options. If we are wrong, we believe the action taken could well disappoint current high expectations. The yen could clearly rebound quite sharply on Friday, perhaps to around 103-104.00.
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Abe's Fiscal Package: What Analysts Expect
Prime Minister Shinzo Abe earmarked a record fiscal stimulus package for Japan on Wednesday in his latest bid to revive the deflation-struck economy, amid concerns the UK's recent EU referendum will have a negative impact on growth.
Abe is putting together a stimulus package worth ¥28 trillion, the highest supplementary budget in Japan's history, to help avoid the economy slipping back into yet another recession.
However, experts are wary about the headline-grabbing figure, not least of all because Abe has so far failed to give details on where the extra spending will go.
"The absence of a major crisis at the moment already raises some question marks on whether policymakers really will press ahead with such large amounts of spending," Japan economist Marcel Thieliant from Capital Economics said in a note Wednesday. "The composition of the package remains unknown at this stage and will only be revealed next week."
Most analysts doubt that the full ¥28 trillion will even be spent on new measures.
"The larger than expected size might well be down to add-ons that do not relate to actual fresh stimulus spending," Derek Halpenny, European head of global markets research at Bank of Tokyo Mitsubishi UFJ (BTMU) said in a note.
"We have already had news reports in recent days suggesting that the actual amount of new fiscal spending could be ¥3 trillion-¥6 trillion with the larger total possibly spread over two fiscal years. If that’s the case, that sized package is already within market expectations and hence could disappoint current higher expectations."
Abe's announcement has also cast doubt over the Bank of Japan's (BoJ) upcoming meeting, where most economists had been expecting an announcement of greater monetary stimulus.
Thieliant says the BoJ is still more likely than not to announce further monetary easing on Friday, but that Abe's stimulus announcement has reduced the chances.
In contrast, Halpenny thinks the BoJ will stand pat on Friday.
"Our view remains unchanged – we believe the BoJ will wait for government fiscal stimulus details to be released and perhaps for other Abenomics policies to be announced before implementing monetary easing."
The BoJ has been largely unsuccessful in boosting inflation in the three-and-a-half years since its massive Qualitative and Quantitative Easing (QQE) program was introduced.
QQE was part of Abe's three-arrowed plan to boost economic growth, which also included greater fiscal spending and structural reforms.
Abe has come under much criticism for not doing enough on structural reforms to get the economy back on its feet.
Next week's fiscal spending announcement will be crucial for the Japanese economy, particularly if the BoJ withholds from implementing more easing on Friday.
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Video preview: What to expect from the Bank of Japan
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Yen surge, the reasons so far
The surge in the yen blamed on retweets
USD/JPY forecast for the week of August 1, 2016
Japan final manufacturing PMI for July 49.3 (49.0 preliminary)
Nikkei manufacturing PMI for July, 49.3
Japan press: Japanese govt grows skeptical of BOJ's inflation target
USD/JPY: Pair Drops Below ¥102 Amid Broad US Dollar Weakness
The USD/JPY pair slid on Tuesday and was seen 0.7% lower during the London dealing, trading around ¥101.70, with further weakness possible in the near term.
The yen has been strengthening since last Friday's Bank of Japan (BoJ) disappointment, when the BoJ left the main rate unchanged at -0.1%, but more importantly, the QQE annual amount was kept at ¥80 trillion, while market participants had hoped for an increase.
Moreover, Japan's fiscal stimulus plan has been reported overnight by Bloomberg. According to a draft version of the budget, the plan includes JPY13.5 trillion of fiscal measures. The report states that new spending will total JPY7.5 trillion of which JPY4.6 trillion (about 1% of GDP) is planned for the current fiscal year.
"The fiscal measures include: i) JPY3.4 trillion for steps to improve demographics, JPY6.2 trillion for infrastructure, JPY1.3 to mitigate Brexit risks and help smaller companies & regions, and iv) JPY2.7 trillion for relief measures for April’s Kunamoto quakes and 2011 Tohoku disaster," analysts at Bank of Tokyo-Mitsubishi elaborated.
Traders will also keep an eye on today's US data. The calendar will offer PCE price indices, personal income and spending, all for June. The data probably won't cause big market movements.
In the previous session the manufacturing PMI for July did not move and stayed at June's level of 52.9 points, while the manufacturing ISM survey fell short of expectations and weakened to 52.6 points in July, down from 53.2 booked in June. In addition, the prices paid subindex worsened notably from 60.5 points to 55.0.
These data undermined the US dollar marginally, but confirmed a not so positive trend in the manufacturing sector of the United States.
BOJ Minutes (June meeting) released
It was the meeting last week (the July meeting) that was the focus
The full text is here.
USD/JPY Technical Analysis: Pair Flat Waiting for NFP
USD/JPY hovered around the 101 handle on Friday, trading in an extremely narrow range in the Asian session.
Japan Ministry of Economy, Trade and Industry (METI) Minister Hiroshige Seko said the government is watching how the strong yen may affect corporate capex plans.
Seko reportedly said a strong yen could prompt big Japanese firms to revise capex plans.
However, the jawboning attempts by Seko had little impact on the yen.
The USD/JPY pair was was 0.07% down at 101.13 as the sun was beginning to set on the Asian session.
The downside is vulnerable below the 101 handle, with a test of 98.78 (June 24 low) likely on violation there.
Markets will continue to track the broader market sentiment ahead of the US non-farm payrolls data due later in the US session.
A break above the 5-DMA (101.38) finds the next resistance at 103 (10-DMA) and then 104.50 (falling trendline).
After two months of wide divergence in NFP numbers (May a big miss, June a big hit), the US dollar could see significant volatility around the release.
Expectations for the headline print at +180k jobs, should NFP print stronger than expectations, then expect additional USD-strength.