Before the Bank of Japan’s two-day policy meeting, the yen traded higher against a basket of currencies on Tuesday session. Analysts fear that the strength of the currency may alleviate the outlook of the corporate earnings in Japan.
Fiscal Stimulus Package
As the yen continues to roar in the foreign exchange, some traders brushed off the expected fiscal stimulus from the government of Japan. Japanese Finance Minister Taro Aso is still imperceptible on the relative actions of the government as the yen extended its gains against sixteen other currencies.
Market players may remain anxious about this significant strength of the yen. Beforehand, the government signaled for a fiscal stimulus package, which may include around 6 trillion yen ($57 billion) of new spending and around 2 trillion will be allocated in the supplementary budget.
Due to the stand of the yen, the traders may be looking for a lower stimulus package compared to what the Japanese authorities may offer. However, there’s a greater probability that the government might end up expanding the monetary and fiscal stimulus. The reason? The yen was still 1.2 percent lower against the U.S. dollar this July as the market deal with the post-Brexit sentiments
Takuya Iwasaki, executive general manager of foreign-exchange sales at Bank of America (NYSE:BAC) in Tokyo, shared a different perspective. He said that the yen’s recent weakness against the dollar has been based on the idea that both the government and the BOJ would come up with measures to stimulate the economy.
Japanese Companies
In other news, a lot of Japanese firms forecasted a downbeat earnings report as the strength of the yen affected their profits in the past quarter. It seems the upsurge of the yen burst the efforts of the Bank of Japan to weaken the currency since it supplements that corporate profits earned overseas. These firms were left with no choice but to increase the price of their products sold abroad.
The companies which reduced their projected profit include Toyota Motor Corp. (NYSE:TM) and the Fast Retailing (T:9983). The head of Toyota admitted that the company misses approximately $377 million on its operating profit over the rally of the yen.
Further, a chief market economist warned that the Japanese electronics companies that operate in the United Kingdom may move toward currency fluctuations as the market deals with various post-Brexit sentiments and as the rally of yen makes the demand for the products much lower.
Central Banks
Aside from the Bank of Japan, the Federal Open Market Committee is also set to have its policy meeting and while the investors expect the greenback to stay close around 105 yen after soaring as high as 107.49 yen the previous week.
On the other hand, the Bank of Japan is projected to introduce negative rates on the loan support programs and to add purchases of exchange-traded funds and real estate investment trust. The bank may finally act now as the pressure from the Japanese authorities heightens. But some of the officials of the bank indicated reluctance to act as they believe that monetary policy is still extremely accommodative.