FOREX: Markets look to BoJ for direction as fiscal reform questioned

DailyFX

THE TAKEAWAY:Japan’s fiscal health and inflation target could be in the spotlight as markets force Yen lower on easing and Abe comments

Engaging in monetary easing in significant size is not something new for Japan however the markets seem to have been interpreting it as just that in the recent months. In October of 2010, the Bank of Japan implemented a comprehensive monetary easing policy which included an Asset Purchase Program. The Asset Purchase Program centered on a size of 35 trillion yen of which 5 trillion yen was to be newly purchased. By April of 2012, the size of this program hit 70 trillion yen and as of December 2012, the program had reached a size of 101 trillion yen.

Since Shinzo Abe's election in December of 2012, the Japanese Prime Minister has outlined his aggressive plans to get Japan out of the current period of deflation. Abe's optimistic inflation target of 2% is double the current inflation target; however newswires are reporting that this target will be accepted by the BoJ with no deadline set for achieving the target. The insistent nature of Shinzo Abe in aiming for a 2% target and more easing could be seen as an attempt by the Japanese Prime Minister to force consumers into increasing their amount of purchases as their Yen become less valuable.

Abe’s series of announcements seem to have had a significant impact on the Yen since September 2012 which the currency depreciating 15% in that time. The market will look to the announcement set to be made by the BOJ on Tuesday of this week to decide what the next big move in the Yen is. Given the amount of monetary easing already in place, the Bank may have to announce a very large spending package should they wish to see the Yen lose more ground. If the BOJ does not deliver this, it is possible that those who are short the currency could start to take money of the table. Currency level worries were confirmed on Tuesday as Japan’s Economy Minister Amari announced that extreme Yen weakness would have a negative impact on the country which sparked some profit taking which moved Yen higher.

Friday the 11th of January saw Shinzo Abe fulfill a promise he made during his election campaign and announced a 10 trillion yen fiscal stimulus package. The government expects that this spending will increase GDP by 2 percent and create about 600,000 jobs. Although the markets seemed to agree with Abe, as the Nikkei rose +1.4% on the news, there could be reason to believe the government’s expectation is optimistic.

The fiscal stimulus and monetary easing packages however, brings into question the government’s commitment to fiscal reform and brings back into the spotlight Japanese debt being at 200% of GDP potentially forcing longer term interest rates higher and cause further problems for an economy already in recession. As the currency remains weak, the cheap nature of exports could be countered by the new expensive level of imports. With the Japanese Yen seeing its lowest points since 2010, the somewhat exponential weakening of the Yen against the Dollar could be running out of steam.

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