Yen Falls On Fiscal Stimulus, While Sterling And Aussie Can’t Sustain Upticks

As uncertainty over Japan’s fiscal stimulus roiled the yen and domestic equities, Prime Minister Abe was forced to announce his fiscal intentions earlier than he initially intended. The JPY27 trillion (~$265 bln) package.   

The details are far from clear, which may help explain why the dollar is in the middle of the two yen range (~JPY104.65-JPY106.55). Note the high for the week was set on Monday near JPY106.70. An unspecified part of the spending will be included in fall supplemental budget, which Japan regularly introduces.  

In addition, there is no distinction between spending and programs that offer low interest rate loans. It is also not clear how much new borrowing in entailed or how it will be done. A Dow Jones report claiming the introduction of 50-year government bonds was denied.  

Another reason that Abe may have felt compelled to announce the size of the fiscal plan, which we suggest is flattered by combining programs and the like, is to create a set of optics that would encourage not only immediate support for the stock market (Nikkei rallied 1.7%) but also to encourage the BOJ to be similarly bold.    

There had been conflicting media reports about the fiscal stimulus, and there has been no better clarity into the BOJ’s action at the end of the week. A newswire poll found 80% of the surveyed expect the BOJ to take some action, with an increase in ETF purchases most favored. However, this alone would not likely satisfy the government or investors. There is talk of adding to it JGB purchases, for which the new supply is not yet publicly known. 

The Australian dollar also has been whipsawed by uncertainty over the policy outlook. The market went into the Q2 CPI report leaning (~almost 60% chance according to the derivatives market) toward a rate cut next week. The headline CPI rose 0.4% in Q2 for a 1.0% year-over-year rate, down from 1.3% in Q1. This is the slowest pace in almost 20 years. The RBA puts more emphasis on the trimmed mean and weighted median measures. The former was a little firmer than expected, unchanged at 1.7%, while at 1.3% the latter was as expected.