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Japanese Yen Will Face Headwinds If Abe Breaks His Fiscal Bonds

Japanese Yen Will Face Headwinds If Abe Breaks His Fiscal Bonds

David Cottle, Analyst

Talking Points:

  • A wire report suggesting that the Japanese Prime Minister would like to loosen fiscal constraints was published Wednesday
  • Preoccupied with other matters, the markets took little notice
  • But that could change, and quickly, if Shinzo Abe does as the report says he would like to

See where the Japanese Yen stands in the trading community’s currency league table at the DailyFX Sentiment Guide.

The Japanese Yen could face severe medium-term headwinds if a wire report released Wednesday proves correct.

Citing government sources Reuters said that the Japanese Prime Minister Shinzo Abe would like to quietly drop his pledge to balance the budget by fiscal 2020. He’d prefer a looser debt/GDP ratio target, the report said. This in turn would give him the leeway to ditch an unpopular hike in sales taxes slated for 2019.

However, Abe has the finest of lines to walk here. Fiscal slippage might mean that Japan keeps its money presses rolling longer. This could mean that Abe’s commitment on currency management to other Group of 20 nations runs into problems. It could lead to more strident accusations of currency manipulation from the United States.

Moreover, any perceived slackness in Abe’s commitment to containing Japanese debt could lead to confidence problems for the world’s number three economy. Japan’s public debt is the highest compared to GDP of any major developed nation – over 200%.

It remains unclear whether Abe will indeed drop his pledge and drop the tax hike. However, he will have unhappy memories of the 2014 tax hike which helped take Japan close to recession. He must also call an election by late 2018 and won’t want to campaign on a looming tax rise.

The Yen didn’t pay huge attention to the report in Asia Wednesday as you can see from the chart.

Japanese Yen Will Face Headwinds If Abe Breaks His Fiscal Bonds

Investors had been preoccupied, as well they might be, by the International Monetary Fund’s downgrade of US growth prospects and Federal Reserve Chair Janet Yellen’s worries about stock prices’ altitude.

Indeed, the Yen retains haven status, the pre-eminent currency which finds buyers when market risk appetite is low. But if Abe does as the Reuters report suggests, Japan itself could become a bigger source of risk.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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