The Japanese yen was once again weaker across the board this morning and hit a fresh all-time low against the euro. This comes as markets recover from the plunge in Japanese Government Bonds (JGBs) earlier in the week.
Yields soared as JGBs slumped following Prime Minister Sanae Takaichi’s promise to cut the country’s consumption tax for two years. Investors expressed concern as Ms Takaichi failed to explain how the tax cut would be funded.
The proposed tax cut, something even ex-Prime Minister Abe (the driving force behind the highly stimulative ‘Abenomics’ programme) shied away from, is undoubtedly a highly politicised decision. It comes after Ms Takaichi called a snap election for 8th February, in an effort to cash in on her current popularity.
This is a very big gamble – both the election and the tax cut promise. If she wins, she could end up with a strong mandate for additional fiscal stimulus to help boost growth. But at what cost? Focusing on the currency, the weaker yen is positive for exporters. But it makes imports more expensive, which could trigger another rise in inflation.
Japan is a big importer, relying on other countries for most of its energy and much of its food. There has already been plenty of speculation concerning intervention to support the yen, and the Ministry of Finance has already warned speculators against selling the currency.
Most analysts believe that the authorities would intervene physically if the USD/JPY were to rally further to 161.00-162.00. This is yet another headache for the Bank of Japan, which concludes its two-day monetary policy meeting early tomorrow.
Source: TN Trader
