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Is Abenomics going out of the syllabus in Japan?

Is Abenomics going out of the syllabus in Japan?

Is Abenomics going out of the syllabus in Japan?

The short answer is no. However, let’s dig into the details.

After the Liberal Democratic Party’s (LDP) crushing defeat in the Tokyo assembly election, there is now speculation that Prime Minister (PM) Abe may be faced with trouble and the need for some changes to economic policies may be pertinent. PM Abe can do this in two ways, firstly, he can implement a regime change in economic policies through a cabinet reshuffle or changes at the Bank of Japan (BoJ) or, secondly, he can focus on closely aligning fiscal and monetary policies. 

If Abe is indeed in trouble and his party is willing to push him under the bus some point next year, it can have significant ramification for JPY. An end to Abenomics would cause a dramatic change to the Quantitative Qualitative Estimation (QQE) and yield curve control, which would push JPY significantly higher with deep implications for the global bond markets. However, we don't see this happening anytime soon.

With Governor Kuroda’s job at risk, an option will be a change of guard at the BoJ; however, even this is more likely to happen by not renewing his five-year term which comes to an end at the start of April 2018.  Even in the case of his departure, it is unlikely that a new Governor will pursue radically different policies while PM Abe is still at the helm.

Next in focus is the BoJ meeting on July 19 & 20, yet we don’t see any change to the policy rate or the 10-Year Japanese Government Bond (JGB) yield target. The annual pace of JGB purchases will also be kept unchanged (JPY 80 trillion) in the policy statement.

Also, on a longer-term basis, we don’t expect a significant change in policy as the Japanese inflation rate remains very low and it is unlikely to see BoJ matching the European Central Bank (ECB) and the Fed in every step of policy normalization. That said, the election result does suggest that we may see some moderation in the BoJ’s expansive policy, especially with respect to monetizing debt.

This article is an extended commentary piece from the FXNavigator service. The FXNavigator service provides intraday analysis of 42 currency markets with technical and economic research being updated multiple times per day. The service also includes fully interactive real-time FX charting utilizing TraderMades exclusive database of more than 40 years of data. Contact us at +44 20 8313 0992 or email for further information.

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