Japan: Stimulus Measures after Victory

Published on July 11, 2016

Key Takeaways:

With new issuance, the second supplemental budget stimulus package will be well over the 10 trillion yen mark, but rumors of 20 trillion are a bit of an outlier reach.

The BOJ will lower its inflation forecast, and is likely to further ease with additional JGB, J-REIT, Equity ETF and potentially corporate and local government bond purchases this month.

While it is not explicit coordination, these monetary and fiscal stimulus measures will supplement each other, and with whiffs of “helicopter money,” will continue to support equities and dollar yen.

Prime Minister Shinzo Abe’s ruling Liberal Democratic Party won 56 seats, and his allied Komei Party 14, of the 121 contested seats up for grabs in last night’s Upper House elections.

We had flagged the momentum building towards a stronger than expected LDP showing this weekend and that the political victory would pave the way for the announcement of an aggressive fiscal stimulus package of over 10 trillion yen that would be highly supportive of Japanese equity markets (SGH 7/7/16, “Japan: Elections, Monetary, and Fiscal Stimulus”). And indeed, the Nikkei Index soared over 4% last night, and the dollar/yen surged by 2% last night, over just such prospects.

We furthermore continue to expect all of that to be accompanied by an easing by the Bank of Japan at its upcoming July 28-29 meeting.

Here now are a few quick follow up post-election updates on the state of play of fiscal stimulus, monetary stimulus, and politics:

Fiscal Stimulus

– The announcement by Abe that the government will issue construction bonds for the first time in four years to finance infrastructure projects, and will issue bonds for public-private partnerships, means the second supplemental budget stimulus package will now be well on the “over” side of the 10 trillion yen mark.

– While there are some advisors clamoring for as high as a 20 trillion yen package, even with Abe’s decision to finance the package with JGB issuance, 20 trillion still seems to be a bit of an outlier reach.

– On the other hand, it appears the Government will offer not only an increase in budget expenses, but will also offer deregulation measures and targeted stimulus for new industries.

Monetary Stimulus

– The specific mention of “public-private” partnership also implies a strong desire to¬† keep the Bank of Japan on its aggressive bond purchase program, and indeed the added issuance will ease the way for more JGB purchases by the BOJ in the already very tight markets, which we continue to expect to be announced at the upcoming July 28-29 meeting.

– Talks with former US Federal Reserve Chairman Ben Bernanke tomorrow will only add fuel to expectations for some much needed fiscal/monetary policy coordination, even by “coincidence” if not a stated “design,” and indeed the administration would not be conferring with such a highly visible outside adviser were his recommendations already not expected to be pretty much in line with their leanings already (see “Gaiatsu”).

– While measure to stimulate the economy on the fiscal side by the Government in theory could lessen pressure on the BOJ to act, as some analysts are now concerned, the BOJ is planning to lower its inflation forecast at this month’s Monetary Policy Meeting, and we continue to expect the BOJ will ease, indeed in support of the fiscal policy.

– As we wrote previously (see SGH 7/7/16, “Japan: Elections, Monetary, and Fiscal Stimulus”), we believe the new accommodation will comprise additional JGBs, J-REITS, and Equity ETFS purchases, and could potentially include local government and corporate bonds.

– Increased issuance of JGBs from perhaps October on, after the settlement of the supplementary budget in the Diet Session starting late September, will again loosen the limits on the hypothetical ceiling for purchases by the BOJ, and that situation may give investors a kind of impression of “helicopter money” which can result in depreciation of the yen.

– We however still do not expect the BOJ to cut rates further into negative territory at its July meeting. The introduction of negative interest rates in January was planned mainly by Governor Haruhiko Kuroda with the assistance of the Monetary Affairs Department, and was a surprise even to other Divisions within the Bank of Japan.

– After this miscommunication, there has continued to be strong criticism of the negative interest rate policy even within the BOJ itself, and perhaps most of all, Kuroda has been hard pressed even after six months to show any positive evidence of its impact on the real economy, equity prices, or even the dollar/yen rate.

Politics

– On the political side, there is some straggling concern among analysts that the very strong showing by the LDP may push Abe’s focus away from economic measures towards constitutional reform, specifically the pacifist Article 9, for which he would have to expend enormous political capital. We believe Abe will proceed for the reform of Article 9 of Japan’s Constitution, but he will be in no rush to do so.

– For all their pacifism, the LDP allies in the Komei Party are no longer really against the reform per se, but they are still reluctant, and it is all still very much still a controversial matter.

– We believe Abe will put nearly all his political capital first into economic stimulus, and only afterwards shift his focus toward the Constitution. We do not expect a national referendum on the Constitution to be held this year, but only perhaps in 2017.

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