London Session: All Eyes On USDJPY And The BOJ

London Session: All Eyes On USDJPY And The BOJ

The biggest news overnight was from the Japan - the government announced a surprise stimulus package to try and boost the flagging economy. The overall size of the stimulus is miniscule compared with stimulus programmes elsewhere, at only $10 billion; however the timing of the move is significant. With Japan's government in deadlock and facing its own fiscal cliff, lawmakers have very little rope to work with. Financial legislation to increase the borrowing limit has been blocked by the opposition to try and force fresh elections (the umpteenth in recent years). If no agreement is reached then Japan, the world's largest debtor, could go over the fiscal cliff edge at the end of November. The money for this stimulus has been found from other budgets, but it is unlikely that more cash will be found. This leaves the BOJ as the only entity in Japan with the tools to kick-start the economy. For an export-based economy like Japan the best way for them to do this is to try and weaken the yen. As rates are already at 0.1%, we expect the Bank to boost its Asset Purchase Programme. The market is looking for an increase of JPY 10 trillion, however we believe there is a good chance it could do more than this - potentially to the tune of JPY 20 trillion - to try and weaken the currency.