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What will happen to the market if Abenomics is terminated
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Loading...Abenomics is named after Japanese Prime Minister Shinzo Abe. This is a monetary policy conducted by the central bank where buying government bonds has become a daily routine. The policy is conducted to lower the value of the yen and create inflation. Currently, BoJ conducts the world's most easing monetary policy:
Twice a month
Up to 1 year: 10b to 100b yen
Six times a month
1 to 3 years bonds: 200b to 300b yen
3 to 5 years bonds: 250b to 350b yen
5 to 10 years bonds: 300b to 500b yen
Five times a month
10 to 25 years bonds : 150b to 250b yen
More than 25 years bonds: 50b to 150b yen
Inflation-indexed bonds: 25b yen, about twice a month
Floating-rate bonds: 100b yen in even months
First, we should emphasize that the yen is considered the safest from the safe haven instruments. Such types of instruments are sought when political uncertainty or market turbulence is present on the market. Starting with Brexit, going through North Korea's nuclear program, choosing Donald Trump as president of the United States, parliamentary elections in a number of European countries, and the rising trade war, we can say we have more turbulence than we need on the market. In such an environment, investors are unwilling to take risks, which in turn reduces prices for risky assets. When investors' capital is withdrawn from risky assets, what remains to be invested in? Exactly! - Safe haven instruments. Better to have a small risk with zero or insignificant returns than a high risk where we can lose significant (if not all) capital.
So, risk situations in the market cause investors to redirect capital (for example) to safe haven instruments (for example, JPY). The high demand for yen, of course, increases its price. The central bank is trying to control this by printing money and buying government bonds. Buying government bonds practically means financing the country. Why is this necessary? Japan is one of the countries that has been severely damaged in its primary and secondary sectors. The whole country has directed its production into the tertiary sector - services. This means that any finance for infrastructure change or any other government spending should come from this sector. The problem is that most companies in this sector are private ... and private companies do not like to give away their money. And what the government does ... wants credit. Who has the capital in such a large amount to give credit to the government .. the central bank. In a purely monetary dimension, BoJ now owns about 40% of Japan.
Lending to such a large extent was approved by Prime Minister Shinzo Abe.
In order to credit the state, BoJ prints a huge amount of money and floods the market with them. This, in most cases, must significantly hurt and weaken the currency, in this case the yen. But it looks like the situation is unique. The large demand for yen by investors, along with government spending, does not leave the currency to sink, even the opposite. Demand is so great that the yen is even rising. In the last few months, JPY is one of the best-performing currencies on the market.
What will happen if the current monetary policy is terminated? First, JPY will rise in the heavens. We are talking about an extremely large currency appreciation. We will stop considering USD/JPY at 100 for strong support. The appreciation of the yen will lead to major difficulties for Japan's exports (however small it may be). If the strong yen situation persists long enough, medium and small businesses in the country will face bankruptcy, and large manufacturers (mainly car makers) will have their worst financial problems in history. If the central bank changes its monetary policy from relieving to restrictive, the government will not be able to finance its activities, and the country may declare insolvency.
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