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By HaleStewart June 24, 2016 7:56 am
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Thoughts on Brexit, Part 2

While it might seem a stretch to talk about Brexit's impact on Japan, consider the following currency charts, starting with the yen/dollar and following by the yen/pound:

Yen devaluation is a central tenant of Abenomics.  The charts above indicate that, until the beginning of this year, the BOJ was successful in lowering the yen's value.  Unfortunately the yen has become a global safe haven asset and as uncertainty increased earlier this year (largely due to Brexit) traders and investors purchased the yen.  That trend accelerated overnight.

This places a great strain on the BOJ and Japan, where the economy has suffered from lackluster growth;  

 

Just this week, the IMF argued that Japan should re-double its stimulus efforts:

Abenomics has made progress in revitalizing the Japanese economy but sustained higher growth and inflation remain elusive. Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the timeframe set by the authorities. Recognizing the risk of falling short, the authorities have responded through easing of monetary and fiscal policies, but the outlook remains weak. Achieving Abenomics’ ambitious targets will therefore require a more substantial, coordinated policy upgrade. Income policies in combination with reforms to tackle labor market duality should move to the forefront, supported by additional monetary and fiscal stimulus in the near term and more credible policy frameworks. The fiscal strategy needs to commit to fiscal consolidation over the medium term and replace large discretionary consumption tax increases with a path of smaller, but sustained increases over a prolonged period. Such a package would make serious headway in achieving the authorities’ objectives, but if it is not forthcoming soon, the timeframe for achieving all targets should be pushed out and policies should be reset for steady but more gradual progress while building risk resilience. This would require embarking on prolonged and cumulatively larger fiscal adjustment and moving explicitly towards a more flexible time frame for achieving the inflation target, while reserving further monetary easing and fiscal stimulus for addressing large shocks.

 

 

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