USDOLLAR Losing Traction as JPY Rallies on Stimulus Letdown
- Fed's preferred measure of inflation due out at 12:30 GMT today.
- See the DailyFX Economic Calendar for today’s US data.
In short, the dual monetary and fiscal stimulus plans out of Japan over the past few days have chalked up to a disappointment. The fault lies with fiscal policymakers, not with the BOJ, though. Whatever the BOJ did/does will have little impact unless the measures are amplified by a concurrent fiscal policy response; we now know the hefty fiscal policy response isn't coming. Logically then, knowing that the fiscal policy response is absent, the BOJ likely withheld its 'big bazooka' for a more appropriate time (I can't say with complete certainty, but I'm very inclined to think that Abe and Kuroda were aware of one another's plans).
As we said last week in our report, "USD/JPY, GBP/JPY Reversals Gather Pace as Scope for Japanese Stimulus Fades" (July 26), this story sounds familiar, no? The Federal Reserve faces the same issue: years of fiscal policy stagnation means any new easing the Fed does will have little impact in the areas of the economy that have thus yet to recover from the GFC. Think of it this way, as if the economy were a car: fiscal policy is the engine; monetary policy is the oil that slicks the gears. If the engine is turned off, or isn't set up to run properly, then it doesn't matter how much lubricant you apply - the car won't run.
The other side to all of this is the way the fiscal policy response was set up (qualitatively as opposed to quantitatively). Much of the fiscal outlays will be in the form of lending rather than direct spending, and the relatively small size of the extra budget offers little confidence for a break from current norms. We know from previous episodes that a small bump in short-term government spending/lending rarely translates into long-term economic growth. In fact, in each year since 1993, the Japanese government has announced an extra budget - yet here we ware, after a quarter of a decade of stagnant growth.
Markets don't have much faith that this set of measures will turn around the Japanese economy, because truthfully, Japan faces a serious structural issue: an aging population plagued by declining birth rates. The Japanese Yen is all of the sudden well-positioned for another rally. Admittedly, whiffs of a VaR shock a la 2003 come to mind, as we warned in December 2015: 2Y JGB yields are up +18-bps since the BOJ decision on Friday; and 10Y JGB yields are up +21-bps. Keep an eye on this if you're trading the Yen.: 2Y JGB yields are up +18-bps since the BOJ decision on Friday; and 10Y JGB yields are up +21-bps. Keep an eye on this if you're trading the Yen.
--- Written by Christopher Vecchio, Currency Strategist
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