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My, my! Yen pairs are seeing a lot of topsy-turvy price action these days, as sentiment keeps shifting on a dime. After a bit of research, I was able to narrow it down to two main events:

1. Government stimulus package?

Yep, that’s right! The BOJ isn’t the only one who has stimulus powers in Japan! The Japanese government is currently mulling about implementing its very own stimulus package that is geared towards offsetting the foreseen negative effects of the upcoming sales tax increase.

Prime Minister Abe is expected to give the go signal on the sales tax hike by October 1. Kyodo News released a report indicating that Abe also intends to announce a corporate tax cut next Tuesday. In doing so, the government can ensure that business spending and investment stay afloat even when overall demand can be weighed down by the sales tax increase.


2. Investors to diversify away from JGBs?

News on Abe’s tax plans wasn’t the only headline-maker yesterday. Early in the day there were also rumors that the Japanese committee on pension reform would urge major investment managers to diversify away from Japanese government bonds (JGBs). If this happens, then we’ll most likely see a capital flight away from the yen and into other currencies.

Fortunately for the yen, the committee only wanted investors to diversify to riskier domestic assets such as properties, private equity, and commodities. Since investors will still need yen to do buy all these, demand for the yen quickly recovered, enough to erase most of USD/JPY’s Asian session spike.

Right now the yen seems to be having trouble taking advantage of positive data from Japan, as the uncertainty surrounding the sales tax and Japanese bonds are keeping a lid on its rallies. These recent events may not have been to bust the yen pairs out of their current ranges, but any surprise catalysts might be enough to spark breakouts. Stay on your toes!