In his first fiscal move since being re-elected as Japan’s prime minister, Shinzo Abe announced plans today that would pump more stimulus into the Japanese economy before Upper House elections in July. The enormity of the stimulus package has lifted concerns of further yen debasement, allowing the USDJPY pair to rocket through the 89.00 resistance barrier.
According to statements released by the Cabinet Office in the overnight, Japan’s government is expected to spend an additional $116 billion in stimulus to support the world’s third largest economy. Forty percent of the total amount will be directed towards infrastructure spending, particularly disaster reconstruction, while 30% of the total amount will be used to bolster increases in private spending and investment. All in all, the stimulus package is expected to add more than 500,000 jobs to the economy, while supporting overall GDP expansion.
Will It Succeed?
The measure is aggressive by nature and should reinforce the current theme of yen selling. However, it is unlikely that the plan will add very much to the Japanese economy. The sentiment was echoed in bond markets, where short term yields rallied following the news. If anything, yen traders will be concerned rather with a potential sovereign debt downgrade from either of the three global credit agencies as the stimulus plan will likely expand the government’s debt load – making it easier for credit ratings to decline.
The country’s ratings were last cut back in May of 2012, from A+ to AA as Fitch warned of “high and rising public debt ratios” affecting the outlook.
The FX Play
Given the recent runup, it’s plausible that the USDJPY may find some near term respite and consolidate. The currency pair has gained by 14% since September 2012, and could look to gain more on a break of the current resistance at 89.25. An upside penetration of the figure would justify an advance on the 92.00 round figure.