This weekend's election success for Japanese prime minister Shinzo Abe makes more stimulus likely, and in turn a weaker yen.
In Sunday's elections, Abe's ruling coalition gained ten more seats in Japan's upper house, strengthening his mandate for the economic policy known as Abenomics, says Susan Joho, an economist at Swiss private bank Julius Baer.
"As a first immediate measure, we expect the government to launch a second supplementary budget assumed to be worth around 5-10 trillion yen ($48-96 billion)," she said, in a statement.
"But this is likely not enough to stem the deflationary pressure, thus Japan must find new ways to stimulate."
Stimulus is likely to weaken the Japanese currency, with Julius Baer predicting that in three months one dollar will buy 106 yen. At time of writing the exchange rate was 104 yen to the dollar.
Abenomics is based on three policy measures: fiscal stimulus, monetary easing and structural reforms. The Bank of Japan is widely expected to loosen monetary policy at its meeting on July 28-29 by lowering interest rates, which are already negative, and by stepping up quantitative easing.
"However," said Joho, "the effectiveness of these existing channels becomes more and more exhausted, thus the pressure is rising on Japan to find new ways of stimulating its economy and inflation."
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