Fiscal stimulus: no bazooka
According to a draft plan obtained by Bloomberg, a 28.1 trillion yen package, including 13.5 trillion yen of fiscal measures are being discussed by ruling party lawmakers today. The latter compromises of 3.4 trillion yen to improve demographics; 6.2 trillion yen for infrastructure; 1.3 trillion yen to mitigate Brexit risks and help smaller companies. Last but not least, 2.7 trillion yen is set aside for relief measures for Kumamoto quakes and 2011 Tohoku disaster. New spending for the current fiscal year is only around 4.6 trillion yen (1% GDP). Hence the positive impact on economic growth and inflation is likely to be small. The Japanese yen (JPY) gained by almost 50 pips to 102 against the US dollar as the size of extra spending was less than expected.
FX-Flash-JPY-100-to-104-range-2-August-2016.pdf (82 KB)
USD/JPY new range of 100-104
Since the beginning of this week, the strength in the yen has paused around the 102 level against the US dollar. Real interest rate differentials between the US and Japan have stabilized and this has put a floor to USD/JPY. In addition, the Bank of Japan’s (BOJ) decision to double the US dollar lending facility has reduced the cost of USD hedging. As a result speculators find it less attractive to increase long yen positions. Hence we think that in the absence of sharp deterioration in risk sentiment and/or substantial declines in crude oil prices (we expect Brent crude oil to find some support around USD 40/barrel), we expect yen strength to be capped around the 100 level against the US dollar. Weakness in the yen is also likely to be supported by investors’ who were caught wrong-footed by the BoJ’s ‘inaction’ last week unwinding their short yen positions around the 104 level. Implied volatility in the yen has declined. Since last Friday, the demand to hedge further strength in the yen has increased but is showing some signs of stabilising. In short, we think that the yen is likely to trade within 100 to 104 in the coming weeks.