Japan: Carrot (Stimulus) and Stick (Intervention)

Japan PM Takaichi announced the largest stimulus package since COVID at ¥21.3 trillion, an even higher number than first proposed. As we have previewed, the stimulus package is going to include energy subsidies (¥7,000 per household and no tax for gasoline), parental cash handout (¥20,000 per child) and rice coupons (¥3,000 per person). Such cost relief measures are targeting the dissent of LDP from rising living cost, especially for rice coupons. However, what has not been covered, is the promise to drive wage growth from SMEs. To drive inflation target to be reached sustainably, the input from SMEs are critical and they seem to be hanging onto the wind for now. The Japanese government is also establishing a 10yr fund for shipbuilding and other critical areas like A.I. & chips. 

PM Takaichi is expected to propose a supplementary budget of ¥17.7 trillion. While there will be partial funds coming from the special account, it is likely trillions will need to be raised through debt issuance. We will see how it plays out as Takaichi is calming market by suggesting new debt issuance will not exceed the one in last year. Even if Takaichi get it through the scrutiny, it will still need to face parliamentary vote where we could see more political compromise from the LDP to its coalition partner. 

As of the election of Takaichi and proposal of new stimulus, the JPY has been on free fall and contributing to rising cost of living. Inevitably, the worsening fiscal picture of Japan could see JPY all further. Thus, we are hearing firm words from FM Katayama in intervening in the JPY. Such verbal intervention has been fruitless but as we fast approaching historic high, market participants will be wary of an actual intervention risk. The BoJ has been intervening in the most capital efficient way in the last two operation. If we see a strong rally within a few days, it is quite possible the BoJ will hit the brakes in illiquid hours to inflict maximum pain on speculators and force longs to stop losses. Still, it will not be stopping but only stalling the weakening of the JPY. All eyes will be on BoJ's December decision.