Expectations Rise Further for BoJ, Increasing Yen and Market Risk
- Japanese Prime Minister Abe announced plans for a ¥28 Trillion fiscal stimulus plans though details are still scant
- The expedited vow for more economic support from the government is likely a plan to bolster a BoJ effort Friday
- If the BoJ doesn't act, the Yen likely surges; and if do, there is a real risk it falls short of expectations
The pressure is building for the Bank of Japan (BoJ) to deliver more stimulus later this week. This time, it is the Japanese government that is upping the ante. Wednesday morning, Japanese Prime Minister Shinzo Abe announced in an unusually disjointed press event that the government was planning a ¥28 trillion fiscal program to help bolster the economy. Details on where these funds will be directed, when it will be employed and how much is new versus previously planned stimulus were saved for a later date. This hasty announcement serves a few potential needs, but the ultimate objective is likely to bolster the effectiveness of a complementary BoJ program on Friday.
Over the past year, the markets have shown growing skepticism over the effectiveness of monetary policy. Ever more extreme stimulus efforts and experimental moves into negative rates and risky assets have resulted in smaller and smaller market reactions (via exchange rates and capital market benchmarks). While monetary policy is intended to be aimed at inflation, employment and growth overall; the market's response has become an unofficial objective for some and it is certainly an immediate vote of confidence - or lake therefore - regardless. With the Japanese government and central bank moving at the same time, the hope is that the market would be more responsive to the scale and coordination.
This only acts to increase the anticipation that the ball has been thrown into the central bank's court and that they need to impress. If the BoJ does not move, the market will find its anticipation of immediate support dashed and the upswing from USD/JPY and other Yen crosses will quickly come undone. The greater risk however is if there is a significant effort made to increase stimulus and the government follows up later; yet the market still shrinks in spite of it in a sign that these institutions are losing their sway over the market's confidence. A slump that follows such a shift would be deeper and more enduring. This is a situation with a clear asymmetry for impact. We discuss the BoJ event ahead and risk/reward assessment in today's Strategy Video.
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