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.