July 14, 2016, 4:00pm EST
Since the Brexit news in late June we’ve discussed a couple of huge implications that we’ve thought will ultimately find Brexit to be a net positive to the global economy (in fact, a big net positive).
First, central banks have had the pedal to the medal throughout the post-Lehman environment, successfully averting a total disaster and manufacturing a semblance of global economic recovery. The missing piece of the policy puzzle has been fiscal stimulus.
In a debt crisis, it’s hard to convince politicians to stick their necks out and approve spending packages when overindebtedness has taken the world to the brink of total collapse. But they’ve discovered, without growth, the debt problem doesn’t get better, it only becomes more threatening. And fiscal stimulus (to accompany the zero interest rate world) is one of the few viable solutions to end the low and stagnant growth rut the global economy has been mired in for the better part of seven years.
So with the widespread uncertainty surrounding the Brexit vote, politicians now have the ammunition/ the excuse to green light fiscal stimulus.
What’s the second “net positive?”
The Brexit fallout may finally give Japan the courage (and also the excuse) to crush the yen.
We discussed this two weeks ago, when Japanese stocks will still sitting near the “Brexit fallout” lows, and yen was strong — yet other markets (including UK stocks, U.S. stocks, oil) had already bounced and recovered.
We said: “We think they can, and will, ultimately destroy the value of the yen — mass devaluation.
Unlike the U.S., which is constrained by “flight to safety” global capital flows and a world reserve currency, Japan has the ingredients to make QE work, to promote demand, and to promote growth. Japan has the largest government debt problem in the world. They have an undervalued currency. They have a stagnating economy with big demographic challenges. They have are in a deflationary vortex.
They have the perfect attributes for a mass scale currency printing campaign. Not only can it work for their domestic economies, but it serves as the liquidity engine and stability preserver for the global economy.
In normal times, the rest of the world wouldn’t stand for a country outright devaluing their way to prosperity. But in a world where every country is in economic malaise, everyone can benefit – everyone needs it to work. It can be the solution for returning the global economy to sustainable growth. We wouldn’t be surprised to see USDJPY return to the levels of the mid-80s (versus the dollar)in the not too distant future. That would be 250+. Currently, 103 yen buys a dollar.”
On cue, this week, due to fallout from Brexit, Japan announced they will be rolling out a large spending package, after Abe’s party secured a super majority in the upper house over the weekend. The package is said to be about $200 billion dollars in fiscal stimulus this year alone, or about 4% of Japan’s GDP! This is huge news. Japanese stocks are already jumping sharply on the news and the yen has been weakening sharply.
And the Japanese government has also just dramatically downgraded both its growth and inflation projections for this year and next. That’s more ammunition for more action.
In Japan, bad news is good news for global markets, because it forces the BOJ and the Abe administration to do more. As we’ve said, we think the grand solution will be a massive devaluation of the yen.
The BOJ meets at the end of the month, and the table has been set for the most powerful response yet – a combination of fiscal and more, bolder monetary stimulus. Japan has no choice but to keep the pedal to the metal. And they have the right formula to use their currency as a tool to solve a lot of problems – both for their domestic economy and the global economy.
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