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Tighter fiscal policy will weigh on activity next year

Even though the Bank of Japan de facto ended Yield Curve Control this week, the yen slid to a fresh one-year low against the dollar. And while it has gained some lost ground since then as US Treasury yields have come off their recent highs, we still think there’s a high likelihood of FX intervention by Japan’s Ministry of Finance in case the yen were to breach 150 against the dollar in earnest. Elsewhere, the sizeable fiscal package unveiled this week is much smaller than last year’s and the resulting tightening of fiscal policy is consistent with our view that GDP growth will slow more sharply next year than most anticipate.

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