Word through the forex grapevine is that Japanese Prime Minister Shinzo Abe has ordered a new round of stimulus for the economy.
Fresh from gaining a majority of the seats in the Upper House elections over the weekend, Abe and his political party seem intent on stepping on the gas for their “Abenomics” plan.
What in the world is Abenomics?
For the newbies just tuning in, Abenomics refers to the set of economic policies being put in place by PM Abe since 2012. In particular, this involves a three-pronged approach of fiscal stimulus, monetary easing, and structural reforms geared towards boosting overall growth, warding off deflation, and trimming the budget deficit.
Under this program, PM Abe tasked the Bank of Japan with the mandate of achieving a 2% inflation target through quantitative easing.
The BOJ has since implemented a QQE program to the tune of 60-70 trillion JPY in bond purchases each year in 2013 then expanded this bond-buying program to 80 trillion JPY per year in 2014.
Apart from stoking inflation, QQE side-effects also included a much weaker yen, which supported export activity.Raising the sales tax from 5% to 8% back in 2014 was also part of the Abenomics program, giving the government more funds to pay rising social welfare costs and hopefully reduce its debt levels.
However, this dealt such a huge blow to consumer spending that the Japanese government had to delay its next round of sales tax hikes by more than a couple of years.
Now that the entire global economy is facing headwinds, PM Abe thinks it’s time to focus on economic stimulus once more.
So what’s included in this economic stimulus package?
Not to be confused with monetary stimulus from the BOJ, which can involve printing more money for bond purchases or lowering interest rates, an economic stimulus package generally refers to fiscal measures imposed by the government in an effort to support domestic demand.
According to early news reports, PM Abe has ordered the construction of a new economic stimulus package amounting to 10 trillion JPY, consisting of steps to encourage future investment and accelerate the exit from deflation.
This could include the issuance of construction bonds to fund the stimulus package – something that the government hasn’t done in the past four years – since its coffers are running low after doling out an aid package after the April earthquakes and postponing its next sales tax hike.
The Japanese cabinet is still scheduled to make its post-election pow-wow and will be discussing how to go about this economic stimulus plan, with one adviser still pushing for a much larger amount of 20 trillion JPY. Further details are expected to be disclosed by Economic Minister Ishihara by July 12 so make sure you watch out for that.
Does this mean that the BOJ won’t need to ease?
Maybe, maybe not. On one hand, BOJ policymakers might prefer to wait for the government’s economic stimulus magic to take effect before using up its own monetary policy tricks. On the other hand, keep in mind that PM Abe has pledged to take “broad, bold” measures to spur economic activity, which could involve prodding BOJ officials to ramp up their QQE efforts.
To top it off, government officials have been expressing their desire to see a weaker yen, as the currency’s appreciation for the past few months has already been hurting trade and domestic price levels.
Jawboning no longer seems to be producing its intended effect so policymakers might be forced to resort to actual easing action. The next BOJ decision is scheduled for July 29.
What’s next for the Japanese yen?
Yen bears are enjoying the party for now as the prospect of additional stimulus could put downside pressure on the currency’s value. However, this behavior could be short-lived since risk aversion from Brexit appears to be the dominant market theme these days.
Besides, the issuance of construction bonds in exchange for cash as a means of funding the government’s stimulus package would mean a reduction in the amount of money in banks’ reserves or in circulation, thereby driving the yen’s value higher.
According to the Ministry of Finance, the previous fiscal year left only about 250 billion JPY available for additional government spending so they gotta put some serious effort into raising funds.
One way to counteract this would be for the BOJ to print more money to ensure that the level of money supply stays more or less the same.
Rumor has it that BOJ Governor Haruhiko Kuroda is currently meeting with former Fed head Ben Bernanke who is known for using three rounds of QE to pull the U.S. economy out of the financial crisis and recession. Any guesses on what they’re up to?