Morning Commentary: Abenomics Meets Suganomics

Foreign Exchange - Morning Commentary
Abenomics Meets Suganomics
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Japan’s Liberal Democratic Party (LDP) will hold its leadership election on September 14.  As things stand, Chief Cabinet Secretary Suga is expected to win and will serve out Abe’s current term as Prime Minister.  Given Suga’s close ties to Abe and a recent speech that emphasized an intention to remain faithful to Abe’s policy mix of fiscal stimulus, monetary easing and structural reforms, the difference between Abenommics and “Suganomics” is unlikely to be large.  Further, BoJ Governor Kuroda looks set to carry on, adding to the narrative of continuality.  

While neither fiscal nor monetary policy looks likely to change, there is the possibility for a change in US-Japan relationship dynamics.  One of the key elements of Abenomics was the BoJ’s ultra-accommodative monetary policy.  Another element was Abe’s close relationship with President Trump.  With Abe leaving, there is a real prospect for a change in US-Japan relations.  Should this change be realized, and particularly if the changes comes with a further deceleration of Japan’s outbound investment flows, markets could be in for a period of yen strength as this combination should pull real rate differentials even more in the yen’s favor.  

Regarding Japanese outbound investments, flow data continues to show that portfolio flows remain moderate.  Net purchases of overseas debt totaled around JPY2 trillion in August, well down from a run rate roughly triple that in late February/early March.  On the other hand equity flows have flipped to net repatriation in contrast to what has typically been outflows.  

Overall, portfolio investment flows remain biased to outflows but only moderately so.  This means that the support USDJPY was getting from JPY-related investment sales has materially weakened.  With the previous period of persistently large investment flows giving way to a more balanced flow picture, gradual JPY strength has becomes more likely. 
  • US stimulus talks remain stuck in place as the Republican-backed “skinny” bill failed to reach the 60 votes needed to advance to a full floor vote.  The vote was pretty much along party lines with Senator Rand Paul the only Republican to vote against it.
  • US CPI came in better than expected with the headline and core numbers both coming in at 0.4%, beating expectations for a 0.3% and 0.2% print, respectively. 
  • The questions of whether euro gains are concerning the ECB continue to swirl in the markets.  Yesterday, ECB president Lagarde said the ECB discussed it, but there was no reason to overreact; however, today, ECB Chief Economist Lane repeated his warning from last week on the impact of a strong euro on inflation.  Given these mixed signals, markets will remain vigilant for signs on the ECB’s policy path.   
  • EU-UK tensions remain high with the EU giving the UK until the end of the month to amend its “Internal Market Bill” that would allow the UK government to ignore parts of the Withdrawal Agreement it previously agreed to.  The EU’s position is that breaking the Withdrawal Agreement would be a violation of international law.  For now, all of this is likely just brinksmanship, but the GBP will be affected by it nonetheless.  
  • Regarding economic news, UK July GDP came in at 6.6%, roughly at market consensus for a 6.7% print.  Strong government support programs have supported the economy but are starting to fade.  The UK also reached a trade deal with Japan.
  • The White House has refused to extend its September 15 deadline for the sale of TikTok’s US business meaning it will either have to be sold or shut down by then.  
  • Beijing has announced that it will take unspecified retaliatory actions against US diplomats in China after the US limited the ways Chinese diplomats can operate in the US.
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