Given the dissolution of the lower house of the Diet, it is highly likely that the Japanese economy will be headed up by new leadership when elections are done in the beginning of December. The resulting situation has bolstered support for LDP leader Shinzo Abe as the country’s new prime minister – with his party commanding 25% of the vote, against a lesser 16% for the DPJ.
However, according to recent Japanese pre-election polls, other lesser known parties have surfaced as well. According to daily surveys released by the Nikkei Business Daily, both the Japan Restoration Party and the Sunrise Party have been gaining significant ground in light of people’s frustration with the current two party system. Moreover, the current economic situation has left a good majority of undecided votes on the table, with regional populations showing double digits when it comes to percentage of voters who haven’t made up their minds.
Should one of the lesser parties gain further traction in the approximately 3-week electoral race, it would place a lot of uncertainty in regards to the future direction of the government. The political gridlock will leave the Japanese yen unfavorable against most counter currencies.
Other than the potential for another leadership change, the USDJPY has been widely supported by expectations that the Japanese government is in favor of a weaker yen. This isn’t anything new. But, this time around, officials are being more proactive about it. Under Shinzo Abe, the government is expected to add to a recently announced $12 billion stimulus package next year, in addition to pushing for more monetary easing from the Bank of Japan. The central bank is expected to begin purchases of domestic bonds and target inflation of 3% in the coming year. More monetary easing will further debase the underlying yen, making it weaker in the face of other majors like the US dollar and the Euro.
Changing of the Guard
And last – but definitely not the least – the USDJPY pair could move higher on expectations that the Japanese government will nominate pro-easing candidates when three BOJ governors step down next year. Ending a 5-year term, BOJ Governor Masaaki Shirakawa is expected to step down from the head position next April, following the departure of two of his deputies in March. This will leave the committee with 3 empty spots – or almost one-third of the overall committee – up for grabs. As a result, adding additional pro-easing candidates could blur the lines between the central bank and the government, setting up for additional political risk on an Shinzo Abe win.
Prospects are bullish for a continuation in the USDJPYpair. The notion has been reinforced by the recent break of resistance at 81.50. The recent surge has also gained above the longer term 94.97-84.17 descending trendline, prompting a likely test of 84.00 in the medium term.
Source: FXTrek Intellicharts