With everyone’s attention focused on the impending US fiscal cliff, little in the market knew about another fiscal conundrum taking place across the Pacific. Lasting for the past several months, it seems that the Japanese fiscal cliff has been averted, and will likely add some pressure on the country’s currency.
In the center of the debate was the Japanese government’s method of funding the almost $1.2 trillion budget for the next fiscal year that runs through March 2013. The administration,led by Prime Minister Yoshihiko Noda, had been pushing for a debt sale that would cover approximately 40% of the enormous budget. However, opposition parties, including the center right Liberal Democratic Party remained staunchly against the notion,given the ballooning national deficit and debt load. LDP members were additionally voting against such a measure as it seemed that PM Noda was backtracking on earlier commitments to call an early general election. Ultimately, a failure to come to terms on the budget funding could have left the world’s third largest economy without cash towards the end of November.
Moreover, the impending scenario would have not only been detrimental to the country and economy, it would have prompted an additional downgrade from Moody’s Investors Service. The global credit rating agency noted that further impediments and delayed action towards the budget were negative for the credit rating of the country.
However, an agreement has seemingly been reached between both Noda and opposition parties, leading towards a Thursday vote that will allow bond sales to help fund the massive budget. Additionally, both sides have tentatively agreed to similar measures to take place in the next 4 years.
FX Effect
With Japanese printing presses now in full force, the likely passage will only raise further speculation of additional currency debasement when it comes to the Japanese yen. Given recent lackluster data pointing towards further contraction in Japan, it is highly likely that further stimulus is on the way via the Bank of Japan – per the request of the government.
The notion will continue to bolster support that is currently established at the psychological 78 figure for USDJPY. Any meaningful upside remains contingent on a break of upside resistance at the 80 round barrier.
Source: FXTrek Intellicharts
