With JPY back around 98 and the Nikkei 225 indicating further advances, perhaps the fears in the market are mis-represented – at least that’s what the other Goldman desk would have you believe.
But, as The Japan Times reports, even glorious leader Abe’s own LDP party are beginning to voice concerns that all this fluff is – well – just that. As we outlined here, the market is already concerned, domestic funds were very unwilling to partake of the exuberance – since they know the limitations of QE in their 20-year balance sheet recession environment – and as Goldman notes, the fact that the JGBi expected inflation level – a now symbolic indicator of policy success since Kuroda quoted it – is now suddenly moving counter to its previous extended trend could possibly indicate the markets’ early signal questioning the credibility of the BOJ policy.
The recent stock price collapse, Lower House LDP lawmakers noted “shows the market expects little (of Abenomics).” The sky-high approval ratings (and business confidence) for the Abe Cabinet have been bolstered by the resurgence of the benchmark Nikkei since ‘Abe(g)nomics began. The stock market’s downturn, therefore, has created a sense of crisis among some members of the ruling LDP, and while they are likely to give the nod to Abe’s 3rd arrow growth strategy, many are pushing for significant fiscal expansion because “Abenomics could fail.”
Re: The Market doubts…
Via Goldman Sachs:
We should note that there has also been a notable reversal in the expected inflation rate. The breakeven inflation rate, embedded in inflation-linked JGBs (JGBi), had been following a sustained upward trend from the middle of 2012. The JGBi market is very small and illiquid, and thus we have not regarded BEI as a reliable proxy variable for expected inflation.
After the change in BOJ leadership, however, Governor Haruhiko Kuroda has referred to the JGBi expected inflation rate on several occasions, stressing that inflation expectations have turned positive as a result of the regime change.
The JGBi expected inflation is therefore a symbolic leading indicator of the policy success of the new regime, and we believe the fact that it is now suddenly moving counter to its previous extended trend could possibly indicate the markets’ early signal questioning the credibility of the BOJ policy, which is beyond the issue of communication inconsistency.
Mortgage rates are already rising, and a higher rate environment could damage the precious positive trend that has developed in the economy. JGB market volatility may also dampen the risk appetite of investors, which could in turn have a negative impact on the equity and forex markets. The BOJ needs to make every effort to stabilize long-term rates to avoid such consequences.
In light of these issues, we think the main theme of the upcoming policy meeting will be improving communications surrounding the intentions and impact of the new policy scheme. We also see them discussing an extension of fund-supplying operations against pooled collateral to two years (from the current 1-year limit) in order to contain immediate market instability.
Re: The Politicians doubt…
Liberal Democratic Party lawmakers have begun to openly express discontent over Prime Minister Shinzo Abe’s economic growth strategy ahead of July’s Upper House election.
Many LDP members have turned on “Abenomics” since the Nikkei 225 stock average nosedived Wednesday on the market’s underwhelmed reaction after Abe unveiled the “third arrow” of his strategy earlier that day.
The sky-high approval ratings for the Abe Cabinet have been bolstered by the resurgence of the benchmark Nikkei since the government and the Bank of Japan hammered out a set of drastic fiscal and monetary stimulus steps earlier this year. The stock market’s downturn, therefore, has created a sense of crisis among some members of the ruling LDP.
As stock prices plummeted following the announcement of Abe’s structural reforms for the economy and a draft of his government’s fiscal consolidation plan, Hitoshi Kiuchi, a Lower House LDP lawmaker, told a joint meeting with the government Friday that “this shows the market expects little (of Abenomics).”
At the gathering, Kozo Yamamoto, another LDP member of the House of Representatives, demanded the government implement fiscal measures that can fully offset the negative impact of the consumption tax hike scheduled for next April. Raising the levy to 8 percent from the current 5 percent “is the biggest risk for Abenomics,” he stressed.
Many other LDP participants voiced their opposition to the growth measures unveiled by Abe last week, especially a plan to eliminate the current ban on online sales of nonprescription drugs. Scrapping this regulation runs counter to the policy platform presented to voters during the LDP’s victorious campaign for December’s Lower House election, one party member argued.
If the Abe administration keeps sidelining the LDP regarding policy management, in disregard of deteriorating macroeconomic indicators, it will have an adverse impact on the party’s fortunes in the upcoming House of Councilors poll, the party sources said.
“Abenomics could fail” and to prevent this, the government should adopt the ruling party’s proposals, a veteran LDP lawmaker stressed.
Yet the LDP is still expected to give the nod to Abe’s growth strategy and other policy measures as early as Monday to avoid internal strife before the looming election, analysts said.
Still, if stock prices and long-term interest rates continue to fluctuate with their recent volatility, this would shake the LDP even deeper, they added.