Japan: Stimulus discussions underway – Nomura

Yujiro Goto, Research Analyst at Nomura, suggests that the economic data and political developments continue to point a high probability of fiscal and monetary stimulus from Japan over the next 1-2 months.

Key Quotes

“The BOJ quarterly household survey (12 May to 7 June) shows further evidence of slowing inflation expectations. Median 1yr inflation expectations slowed to 2.0% from 3.0% the previous quarter. Average 1yr inflation expectations slowed to 3.8%, its lowest since Q4 2012. The Japan Center for Economic Research survey also showed a further slowdown in consensus inflation forecasts. The FY2016 core CPI consensus forecast has declined to 0.03% and shows the economy is now on the edge of deflation.

Nikkei also reported that the government is considering lowering its FY2016 GDP growth forecast to 0.9% from 1.7% (unconfirmed). The consensus of private economists has already been lowered to 0.62%, so this change would not be a surprise. The BOJ forecast 1.2% growth in FY2016 as of April, and the Bank is likely to lower this forecast too. Although a lowering of GDP growth forecasts would unsurprising, it could also be viewed as further pressures for a bigger economic stimulus package. Prime Minister Abe met Mr. Bernanke today, and it was reported that Mr. Bernanke asked Prime Minister Abe to carry on with Abenomics. Mr. Bernanke’s positive comments on Abenomics could be used as a rationale for expanding Japan’s economic stimulus.

Prime Minister Abe officially ordered Economy Minister Ishihara to compile a list of stimulus measures this month. The stimulus package is likely to be approved by the cabinet in early August, before the expected cabinet reshuffle on 3 August. The media will likely report on the details of the package prior to cabinet approval. Economy Minister Ishihara said he would consider the size of economic stimulus from now, but would not commit to the size of the package yet. He said that issuing construction JGBs for stimulus was possible, but that it would not be desirable to issue deficit financing JGBs. The comments suggest the stimulus package could be bigger than JPY10trn, while a JPY20trn package is less likely.

As there is also a BOJ meeting scheduled on 28-29 July, the final week of July will be important for USD/JPY, as the Japanese stimulus package will be clearer. Expectations for stimulus will likely support USD/JPY into these event risks, but elevated expectations still pose a risk of disappointment.”