In a somewhat surprising turn of events, Japanese PrimeMinister Yoshihiko Noda announced his intention to dissolve the lower house of Japan’s parliament, essentially paving the way for general elections. The event has caused quite a stir and could place downward pressure on the yen until the end of the year.
Bargain Upheld
Although today’s announcement stunned the markets, it remains somewhat unsurprising in the wake of this past week’s deal struck between PM Noda’s DPJ and the reigning opposition – the Liberal Democratic Party (LDP). Headed by leader Shinzo Abe, the LDP quickly agreed to allow the passage of a bill that would permit further governmental funding to be obtained through official bond offerings. Previously, the more conservative LDP staunchly disagreed with the measure, bolstering Japan’s own version of a fiscal cliff. However, both sides have reached an agreement to avert the fiscal debacle, allowing debt offerings to fund the administration’s budget for the upcoming fiscal year and the following three. In return, PM Noda remained committed to calling general elections before next month. General elections are now likely going to take place December 16th.
The dissolution of the lower house of the country’s parliament is likely to be a disaster for Prime Minister Noda and his DPJ party. Falling approval ratings and a dwindling constituency are expected to push the LDP back into power, following a brief hiatus from the prior 50 years of relatively uninterrupted rule. Early opinion polls expect the LDP to recover key seats in parliament as well as LDP leader Abe to be elevated to Prime Minister – a seat he lost in 2007. This would be the country’s seventh leadership change in the last 6 years.
Policy Direction
With Shinzo Abe back at the helm, the newly passed sales tax bill is likely to be repealed. In addition, Abe is expected to bring about a more hawkish stance against China –a major trade partner – as well as raising the Bank of Japan’s target inflation rate. The rate is expected to be lifted to 3%, prompting even more stimulus by the central bank. Ultimately, the increase in monetary stimulus will be detrimental to the Japanese yen, already suffering from a bout of devaluation.
Yen Effect
Bouncing from 79.36 support, the USDJPY has breached short term resistance at the psychological 80.25 figure. However, bullish momentum is questionable at this elevation, likely prompting a temporary retracement to support at 79.80 in the short term. A viable break higher would require an upside violation of the 80.50 barrier, which would place the 82.00 round figure in play.
Source: FXTrek Intellicharts
