Factors such as the Eurozone crisis, the slowdown in Asia and the potential impact of QE3 have all contributed to general instability in consensus opinions. He notes that “Japanese equity markets are the main under-performers today with the Topix index down 2.0% on the day. Tensions between China and Japan, political uncertainty and the appreciation of the yen all served to hurt confidence in Japan.”
Political tensions with China look set to continue and escalate as former Prime Minister Shinzo Abe won the LDP party leadership election. Opinion polls indicate that he is well placed to win the upcoming election and he has argued for an aggressive approach to the island dispute with China, going so far to suggest building on the disputed territory.
Halpenny notes that Abe has an aggressive stance towards the BoJ and recently suggested an inflation goal as high as 3% should be forced on the central bank. He notes “that appears unrealistic but certainly pressure on the BOJ to move to a 2.0% target and act more aggressively will increase further now.”
He continues to explain that PM Noda has promised to call a general election soon and with the LDP refusing to pass a deficit financing bil until a date is confirmed, an election in November looks likely. However, if a deal is not found, there is a risk of the Government running out of funds for day-to-day financing later this year.
Halpenny finishes by noting that “For now the yen is likely to be driven by broader financial market conditions and therefore may well remain under upward pressure. Nonetheless, a more aggressive LDP with Abe as leader should have a negative impact on the yen beyond an LDP election victory.”