With the dissolution of parliament by Japanese Prime Minister Yoshihiko Noda expected to take place tomorrow, a lot of attention has shifted to the future of the Japanese government. The environment has injected volatility In the USDJPY, a pair not usually associated with extreme moves. So, what’s changed?
The Rundown
Two days ago, in an effort to avert Japan’s own version of a fiscal cliff, PM Noda struck a deal to allow the Japanese government to conduct bond offerings in order to fund the administration for the next fiscal year –and subsequently for the next four after that. But, the deal came at a cost. With the opposition Liberal Democratic Party of Japan (LDP) allowing the bond auctions to take place, Noda was forced to adhere to early commitments that a general election would be called before the end of the year.
The deal may have cost Noda his position as it seems that the LDP – in early opinion polls – is expected to win crucial seats back in parliament, as well as replace Yoshihiko Noda as the country’s prime minister. In his stead, Shinzo Abe – political head of the LDP – is expected to take back the seat he lost almost 5 years ago.
Now, it’s not just the fact that Abe may be elected in the country’s 7th leadership change in as little as 6 years that’s rocking the yen. It’s the fact that Shinzo Abe will likely push for a harsher stance against China, and more importantly against deflationary pressures currently plaguing Japan. The sentiment has been echoed in recent comments by Mr. Abe, who noted an extension of inflationary targets to 3%, far above the current deflationary rate of 0.3%. And, in order to achieve this, the newly favored political head is expected to push for more stimulus by the Bank of Japan. In recent days, Abe has indicated a potential need for unlimited monetary stimulus.
Currency Effects
So, what does unlimited stimulus and a desire for inflation mean for the yen? Further debasement. Simply put, it means that the Japanese yen, by monetary standards, will begin to lose value against most other currencies due to the sheer volume in the market. The effects are already being speculated on in the USDJPY pair, which has surged to a six month high.
The recent advance will likely see an extension higher,especially if the 81.50 technical barrier is penetrated. If that happens, markets could witness a USDJPY rate near 84.25, a level not seen since April 11, 2011.
Source: FXTrek Intellicharts
