MORGAN STANLEY: Here's What Japan Will Do If The Market Keeps Crashing

Japan Shinzo Abe

Morgan Stanley economist Takeshi Yamaguchi weighs on the question of what’s likely to happen if the market keeps crashing, as happened on Thursday, when the Nikkei fell 7%.

In case of prolonged corrections, additional policy ‘arrows’ would likely support the economy: The emergency press conference by Economy Minister Amari on May 23 may have not been received favourably by the market, but is nonetheless a sign of the Abe administration’s strong focus on stock market trends. In case of prolonged corrections in the stock and FX markets with a risk of significant worsening in households and corporate sentiment, additional policy actions, both fiscal and monetary, would likely be deployed. On the monetary side, the BoJ could consider offering long-term fixed-rate lending operations with a two to three-year maturity, a Japanese version of LTRO, partly with the aim of lowering the volatility in the JGB market. While the longest tender of the current fixed-rate funds-supplying operations is one year, they have been effective to an extent, functioning as “signaling operations”. The BoJ could also consider raising its purchase pace for ETFs and J-REITs. On the fiscal side, potential measures would include a one-year postponement of the consumption tax hike currently scheduled from April 2014, or an additional stimulus package. These policy actions would further reduce the possibility of the economy entering a double-dip.

Meanwhile, Japan had another wild day on Friday –>

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