The LDP stated that it will form a coalition government with the New Komeito Party after its landslide victory in the Japanese General Election. Together, the new government would possess 325 seats in the Lower House although it remains a minority in the Upper House (16 seats short of a majority). The new administration's immediate goal would be to stimulate the economy through both fiscal and monetary measures. Japanese yen slipped and the Nikkei soared after the election amid hopes of further easing news from the upcoming BOJ meeting.
On the monetary front, the Prime Minister-election Abe reiterated that he would reappoint the BOJ Governor and Vice Governor. Appointment of personnel requires ratification of both the Upper and Lower House but it's expected that the Upper House would approve candidates who are supportive of setting an inflation target to BOJ's management. The monetary stance would remain accommodative. Indeed, we anticipate this week's BOJ meeting would lead to announcement of increase in the size of the Asset Purchase Program (APP) by 10 trillion yen. The central bank remains under pressure to add more stimuli next year. After the new team of board members is formed, the BOJ would move forward to measures such as setting a 2% inflation rate target, extending the duration of its asset-holdings (including lengthening JGB maturities), and expanding its balance sheet by raising or even eliminating the upper limit on the APP.
Concerning fiscal policies, the immediate job for the new administration is to propose the supplementary budget for FY2012 to combat deflection through increase in public spending. The new government will also begin planning on the FY2013 budget as well. Concerning the consumption tax, Abe had joined the DPJ in supporting doubling the tax to 10% by 2015. However, he recently stated that Japan's economy needs to pick up more before the law can be enacted. The market currently anticipates 50% of chance that the new administration would push this measure in the current market environment.
The decline in Japanese yen after the election result indicated speculations of more aggressive monetary easing ahead. After gaining the two-third majority in the Lower House, the chance the collation government would gain the majority at the Upper House election scheduled in July 2013 has increased.
Source: http://feeds.actionforex.com/~r/ActionForexall/~3/9huIJBb3GOQ/
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