USD/JPY, GBP/JPY Reversals Gather Pace as Scope for Japanese Stimulus Fades

Talking Points:
– Japanese fiscal stimulus program is much smaller than anticipated (¥6 trillion versus ¥10 trillion).

– Lack of significant Japanese fiscal policy program reduces likely of major, effective BOJ easing on Friday.

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– As market volatility stays elevated post-Brexit, it’s a good time to review risk management principles.
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The Japanese Yen has made a sharp reversal the past 24-hours as investors have succumbed to reality: hopes for a major, ‘fix all’ set of stimulus measures won’t be coming down the pipeline. With rumors swirling about a potential ¥10 trillion fiscal stimulus program, the multi-year, ¥6 trillion program set to be announced (per the Nikkei financial daily earlier today) is clearly short of expectations.
Concurrently, with fiscal policymakers seemingly falling short of what was admittedly a high hurdle, the scope of expansive stimulus from the Bank of Japan seems to have dwindled as well. Put plainly, whatever the BOJ does will have little impact unless the measures are amplified by a concurrent fiscal policy response; we know the fiscal policy response isn’t coming. Logically then, it would behoove the BOJ to wait to use all of its ammunition now when it may not be the most ample time.
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.
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Between the Fed and the BOJ, now that the bar for BOJ disappointment has been lowered within reach, expect more significant volatility out of JPY-crosses through the rest of the week (more so than estimated coming into this week).

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