Japan: Fiscal stimulus expectations rise further – MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the expectations of possible action by the Japanese authorities to boost economic growth continue to rise with the markets now reverting back to the belief that the fiscal stimulus package could be as large as JPY 20trn.

Key Quotes

“Kyodo News is reporting that due to the potential negative fallout from the Brexit vote, the fiscal package will now be larger than the previously planned JPY 10trn package. We are somewhat dubious of this logic for starters – a doubling of the package because of Brexit from a country that does not have extremely close economic ties lacks a degree of credibility.

Of course, the decision to go for a bigger fiscal stimulus package may be down to other factors but the make-up of package also suggests the JPY 20trn headline sounds better than the reality. Kyodo News is also reporting that the package will include spending on projects going into FY2017 and beyond while some of the total size of the package might not purely new spending – so the actual size of freshly financed stimulus could be a lot lower. That all points to the potential for some disappointment as market participants conclude this is nothing like what is being implied. In particular, the larger any fiscal stimulus package is the more investors will conclude that Japan is moving closer to some formal policy stance centred on ‘helicopter money’. We think that is not at all likely any time soon. 

Finally, while the rise in short-term yields in the US is also perhaps playing a role in this move higher in USD/JPY, we would remind readers that the nominal 2-year yield spread correlation with USD/JPY has not been a reliable driver of USD/JPY since ‘Abenomics’ began – the real yield spread has been far more reliable and hence once the optimism over stimulus in Japan fades, leading to a further decline in inflation expectations, USD/JPY is set to fall too.”