It’s only been a few weeks since the Liberal Democratic Party of Japan (LDP) took back its position as the ruling party, but LDP leader Shinzo Abe has already rocked the markets with two major decisions.
Re-establishment of the Council on Economic and Fiscal Policy
The Council on Economic and Fiscal Policy was established in 2001 with the aim of setting mid-to-long-term economic goals. The group didn’t hold meetings while the Democratic Party of Japan (DPJ) was in power, but last Wednesday Abe had called together its first meeting in almost three and a half years.
Aside from implementing fiscal and economic strategies together with the newly established Economic Revitalization Headquarters, the council is expected to improve the communication between the Bank of Japan (BOJ) and the government, especially since BOJ Governor Shirakawa is one of its members.
It’s no mystery to market junkies as to why Abe wants better communication with the BOJ. After all, he has aggressively called for the BOJ to double its inflation target to 2% to lift the economy from deflation. Recently, he has also hinted that the BOJ should take more responsibility over the country’s employment numbers.
Approval of fresh stimulus
Just yesterday Abe’s cabinet gave its approval for an additional 10.3 trillion JPY (116 billion USD) worth of stimulus that is expected to create around 600,000 jobs and boost the economy by as much as 2%.
The Cabinet Office revealed that 3.8 trillion JPY would go to disaster prevention and rebuilding efforts. Around 3.1 trillion JPY will be used to stimulate innovation and improve the competitiveness of the Japanese industry, while another 3.1 trillion JPY will go to social security programs. If we include both the private sector and local government contributions, the total stimulus could add up to 20 trillion JPY, the second largest since the Lehman brouhaha in 2008.
With promising programs in store for Japan, you would think that the yen would get some love from the currency bulls. Instead, it continued to weaken against its counterparts and even reached a two-and-a-half-year-low against the dollar last week.
But the high probability of the government actively weakening the yen contributed a lot to the yen’s current weakness. But what’s putting bees in some analysts’ bonnets is the possibility that the government’s efforts would only inflate the country’s debt, which is already at a whopping 230% of its GDP.
Over the next few months it would be hard for the government to prove that its latest efforts wouldn’t go down the same drain as the previous stimulus programs. In fact, some have already remarked on the improbability of its construction schedules and growth estimates. But right now Abe looks determined and market players are still convinced of his commitment to drag the economy from its “lost decades.”
So until we hear more doubts on Abe’s conviction and see more weaknesses in his decisions, it’s not a bad idea to assume that the yen will continue to weaken. But be vigilant on your yen trades! You never know when a wildcard will appear and turn the market themes around!