FX COLUMN- High summer in Japan may mean a low yen

Wed Mar 26, 2014 6:31am EDT

-- Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own --

By Neal Kimberley

LONDON, March 26 (Reuters) - The Japanese yen could be vulnerable to a renewed emphasis on economic policies by Prime Minister Shinzo Abe's government, whose constitutional and foreign policy objectives have become somewhat bogged down.

The combination of fiscal and mooted structural reforms allied with supportive monetary policy easing by the Bank of Japan (BOJ), often collectively called Abenomics, have so far been a signal success for the Abe government.

The value of the yen, as a side effect, has fallen in the wake of the implementation of Abenomics.

But other parts of the government's agenda, notably a less apologetic foreign policy and an attempt to tweak Japan's pacifist constitution, have proved more contentious.

Japan's top government spokesman on Monday categorically denied a suggestion by a close aide to the prime minister that Tokyo might revise a landmark 1993 apology to women, many Korean, who were forced to serve in wartime military brothels.

Abe's hopes of reforming constitutional constraints on the freedom of action of Japan's military forces, meanwhile, have run into some push-back, most notably from within the ruling coalition itself.

"I think it is wanton for the government to change overnight the interpretation of the constitution to allow the exercise of the right of collective self-defence," Natsuo Yamaguchi, leader of dovish coalition partner New Komeito, said over the weekend.

Abe may yet get his way on some of these issues but will have to expend considerable political capital to do so.

His government may instead be tempted to refocus on its economic policies, which have proved far less troublesome.

Given that his political approval rating largely rests on a perception that Abenomics is having a positive economic impact in Japan, the best way for him to leverage his overall position might be to reinforce those very same economic policies.

JUNE

No doubt the Bank of Japan will want to see how the 3 percentage point rise in the sales tax to 8 percent on April 1 affects consumer activity before taking any steps to ease monetary policy even further.

BOJ Governor Haruhiko Kuroda is nevertheless ready to act if needed.

Intriguingly, Bank of Japan Deputy Governor Kikuo Iwata said on Monday that "the biggest worry now is that economic growth will slump in the second quarter after accelerating in the first quarter due to a rush in spending."

That would mean June might be the time for the Japanese central bank to begin taking stock of the situation.

Coincidentally, the Abe administration has pencilled in June as a date when the Government Pension Investment Fund (GPIF), might finalise an allocation model that cuts the weighting of domestic bonds and increases that of local stocks.

Takahiro Mitani, head of the $1.26 trillion pension fund, said on Tuesday he was not averse to the GPIF lowering its holdings of Japanese bonds, given low yields on offer in Japan.

It may not be too far-fetched to see a scenario where the Bank of Japan steps in to buy government bonds being sold by the GPIF in the middle of the year.

That could dovetail with the rollout of any new expansionary monetary measures, depending on the BOJ's evaluation of the impact of the sales tax hike.

It would certainly help underpin the government bond market even as the GPIF reallocates money from domestic bonds to local stocks, pushing up the value of the Japanese stock market.

Abenomics would get a new lease of life - and might just help boost the Abe government's political room for manoeuvre in more contentious areas of policy.

With foreign exchange traders likely to associate any new round of Abenomics with a weaker Japanese currency, high summer in Japan may mean a lower yen. (Editing by Hugh Lawson)

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