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Fiscal outlook is the biggest risk to the yen

The government is due to announce its medium-term fiscal plans in June. Either this will mark the start of a long period of fiscal restraint, weakening the economy again and requiring further monetary loosening (we think this is the most likely outcome). Or the plans will lack credibility, in which case Japanese government bonds and financial markets generally would be hit hard. In either scenario, the yen looks vulnerable.

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