Japan: What did Abe decide on the golf course? - Westpac

Sean Callow, Research Analyst at Westpac, notes that the Japanese media report that PM Shinzo Abe is at his vacation home west of Tokyo this week, where apparently his key leisure activity will be playing golf.

Key Quotes

“But he has plenty of policy matters on his mind. A reshuffle of Cabinet and LDP leadership is expected on 3 August, while there have been competing stories on the scale and composition of a new fiscal stimulus package, with reports mostly of JPY10trn or 20trn ($187bn). Such talk has helped the Nikkei rally 11% inside 2 weeks and added background support to USD/JPY by reducing safe haven yen demand. This has helped squeeze the overhang of speculative short USD/JPY positions (leveraged funds’ JPY net longs in futures this month reached highs since 2011).

Expectations for bold fiscal and monetary stimulus post-Brexit continue to rise in a number of jurisdictions. We are drawing close to judgement day on such expectations, with potentially large reactions in FX markets looming. Abe is expected to lead negotiations over the fiscal package before approval on 2 August. But the greater risk for FX seems to lie in the Bank of Japan announcement on 29 July. Some sort of policy easing seems likely given a softening in even core inflation in recent months. But we suspect there is too much talk of “helicopter money”, making a degree of disappointment likely, interrupting the USD/JPY recovery.

The ongoing BoJ bias towards looser policy should be supportive of AUD medium term, as should the likely resumption of BoE QE and ongoing ECB asset purchases, making AUD yields look more enticing. But the recovery in global risk appetite since the Brexit selloff (e.g. record highs in US equities) is a mixed bag for AUD/USD. Global optimism is supportive but firming expectations for Fed tightening should help cap AUD/USD near 0.76 multi-week.”