Japan: Details of fiscal stimulus plan in focus - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen continues to trade on a stronger footing after the BoJ disappointed market expectations by only tweaking monetary policy settings at their last meeting.

Key Quotes

“With the BoJ running out of policy options at the current juncture, the burden for supporting the growth and inflation outlook in Japan is falling more heavily onto fiscal policy. The BoJ took into consideration the impact of looser fiscal policy as well at last week’s policy meeting and it is one reason why they did not ease monetary policy more aggressively.

Further details of the government’s fiscal stimulus plan have been reported overnight by Bloomberg ahead of the official announcement today. According to a draft version of the budget, the plan includes JPY13.5 trillion of fiscal measures. The report states that new spending will total JPY7.5 trillion of which JPY4.6 trillion (about 1% of GDP) is planned for the current fiscal year. The fiscal measures include: i) JPY3.4 trillion for steps to improve demographics, JPY6.2 trillion for infrastructure, JPY1.3 to mitigate Brexit risks and help smaller companies & regions, and iv) JPY2.7 trillion for relief measures for April’s Kunamoto quakes and 2011 Tohoku disaster.

The fiscal plan is expected to modestly lift the outlook for growth in Japan in the year ahead. However, we do not expect it to materially increase inflation expectations and as such it is unlikely to re-weaken the yen. We continue to expect the yen to remain on a stronger footing. The yen has strengthened sharply so far this year but it still remains modestly undervalued according to our long-term models.”