Week In FX Asia: Japan’s $182 Billion Package To End Deflation

This week the Japanese government approved a $182 billion package to follow through on Prime Minister Shinzo Abe’s goal of reaching 2 percent inflation in 2 years. The first arrow of the Abe plan has been successful so far. The Bank of Japan has pledged to double the monetary base and have delivered. The announcement earlier this year turned out to be one of the most pro-active actions from a Central Bank since. In a year where there was a lot of rhetoric and back tracking, the BoJ deserves a lot of credit for their actions.

The effect in the Yen was almost immidiate to the point that it sparked another round of “currency war” comments from emerging market economies. The G7 stood by Japan and dismissed manipulation claims. So far so good for Abe, but his other two arrows have not been as effective. Fiscal flexibility and structural reforms have struggled due to internal political pressures.

The package announced this week is intended to reassure markets that Abe will continue to push a growth strategy coupled with structural reforms. There are question marks about how effective the $55 billion package can be. The headline number of $182 billion includes government loans and local government budgets which is nothing new. So far the move is seen as a positive, but if it needs to deliver on its 1% growth boost and job creation goals.

The stimulus package is also a way to offset the effects of the sales tax that will be introduced next year. The tax increases is a much needed move to reduce Japan’s debt burden. In order to compensate for the potential hit to consumption that a higher sales tax will have Abe needed to introduce this package.

The fall in the yen, which is a boon for an exporting nation like Japan, has benefited corporate Japan but so far corporations have not raised wages. This week Japanese corporations have increased capital spending in the third quarter which was stagnant before and could signal wage increases if the momentum is maintained.

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