What Japan wants from the G7 is exactly what Germany fears

HONG KONG - Prime Minister Abe will host the G7 this coming Thursday in what is a very difficult time for Japan. Although GDP growth for Q1 was better than expected, Abe – and Horihito Kuroda, Governor of the Central Bank – know pretty well that a recession is looming, especially if the Yen remains strong.

With the Upper House election on July 10, Abe cannot be asking the rest of the G7 for help, says Alicia Garcia Herrero, Chief Economist, Asia Pacific, for Natixis. Help in the G7 language means, at best, co-ordination of policies and, at least, a reference in the communique, she says.

“The two issues of relevance are the Yen and fiscal policy. Between the two, we believe Abe will opt for support on fiscal policy from the rest of the G7 members as the Yen has recently bounced back somewhat from its sudden appreciation trend. In fact, Abe has already leaked that he will use fiscal policy to support the economy by delaying the VAT hike and/or (probably and) introducing an additional stimulus package.

“The key opponent to Abe’s intentions is Germany. With the lowest debt among the G7 counties and on a decreasing trend since 2012, Merkel has no intention öf including fiscal policy in the G7 communiqué as a key tool to respond to  world growth woes. More importantly, Germany is to push for what Abe has so far procrastinated on during his mandate: structural reform.

“The G7 match will, thus, probably end up 0-0 for Abe and Merkel.” www.nataxis.com (ATI).