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A big week for the Bank of Japan and Shinzo Abe

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There is likely to be plenty of action if you are trading Japanese yen (JPY) this week. Tomorrow the Bank of Japan is scheduled to give its latest decision on interest rates. Governor Haruhiko Kuroda is expected to leave the policy rate unchanged at -0.1%, but the market is also going to be firmly focused on the BoJ’s Quantitative Easing (QE) program, which is still running officially at JPY 80 trillion per year (£550 billion a year). That works out at more than the Bank of England’s entire QE strategy over the past decade.

The Bank of Japan has been undershooting its target recently: analysts are wondering whether the Bank is leaning towards tapering, as wages in Japan are growing as is inflation. Both are still below the target of 2%.

Looking at the situation with the rest of the world, the Federal Reserve is now withdrawing QE, the Bank of England has stopped increasing its own scheme, while the European Central Bank has said it will stop expanding its own QE program in December. In the context of these statements, some analysts are expecting something similar from Kuroda imminently.

Currently there have been no indications that Kuroda will do anything at all this week, but there is also evidence that reality may be about to set in. The Bank of Japan already owns almost half – yes, half – of the entire market for Japanese government bonds (JGBs). It also owns 80% of the domestically-focused ETF market and is a top 10 shareholder in about 40% of Japan’s 3700 quoted companies.

This has led to a situation where, in the words of AJ Bell investment director Russ Mould, “the bond market is rebelling” with the yield of the benchmark 10 year JGB threatening to break the 0.1% target ceiling that the Bank of Japan has set.

The Bank of Japan’s balance sheet is also nearly 100% of GDP, which is staggering when you consider that the Bank of England’s is only 24%.

Political clouds swirl around Shinzo Abe

But the Bank of Japan aside, there are also political questions to be answered. On Thursday Japanese prime minister Shinzo Abe is facing a triennial election for the leadership of Japan’s Liberal Democratic Party. He is facing off against the former defence minister, Shigeru Ishiba, the same man he beat to win the leadership in 2012. Seasoned Japan watchers think a defeat for Abe is unlikely, despite a series of scandals that have hit the government.

If Abe were to lose, or resign, the markets would likely take fright, and we can expect a major sell off in both the JPY and the Nikkei 225. Investors would fear for the destruction of Abe’s ‘Three Arrows’ strategy of economic reform, referred to as ‘Abenomics’ outside Japan, which has helped to really drive Japanese equities since 2012. In short, the market is tying the future economic well being of the country to Abe himself – if he were to go, traders can expect weeks of volatility in the JPY.

It’s all to play for: if Abe can survive this week and win the election scheduled for November 2019, he will become the longest serving Japanese prime minister in modern (post 1945) history.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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