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Abe introduces greater risk into Japanese markets – RBS

FXStreet (Barcelona) - The Research Team at RBS note that the intense speculation that Japanese PM will call an election on 14 or 21 Dec and delay the second consumption tax hike for at least 18 month to April 2017 has generated additional volatility in Japanese markets.

Key Quotes

“Apart from a weaker and then more volatile JPY, Japanese long end yields rose significantly; 10 year JGB yields rose 4bp yesterday, although they have eased 1bp so far today.”

“The news while potentially growth positive is taking more fiscal risks. As we discussed yesterday, if Japan achieves its inflation mandate without much progress towards fiscal sustainability, then it threatens to generate a currency crisis. Questions will be asked - who will buy JGBs and fund the fiscal deficit if the BoJ is tapering its QE?”

“We see potential for greater conflict between BoJ and government policy if Abe delay’s the consumption tax hike, especially if inflation does materialize faster than expected. This might see greater upward pressure on JGB yields, and greater volatility in the JPY and equity market (perhaps reminiscent of the events in May last year when JGB yields unexpected rose sharply and USD/JPY rose to new peaks and then dropped sharply).”

“It will not be in the interests of Japanese policymakers to see volatility in its markets, especially if it is heading into an election mode. As such, we might expect to hear more jawboning discouraging sharp moves.”

China Industrial Production (YoY) came in at 7.7%, below expectations (8%) in October

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