FXstreet.com (Barcelona) - The final trading day before the Japanese general election on Sunday has seen further yen selling in anticipation of victory for Shinzo Abe and the LDP writes Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ.

He notes that in one of the final opinion polls conducted by the Nikkei newspaper, the LDP and its strong coalition ally, New Komeito are set to gain close to the key two thirds majority or 320 seats. This latest opinion poll shows that the LDP was making a comeback in single seat constituencies in Tokyo and other large cities where it suffered huge losses in the last election in 2009.

The LDP has solid leads in about 180 districts, has gained an advantage in 7 of the key battleground districts covering a further 70 seats and in PR voting is on track for an additional 60 seats. Depending on how many of the key battleground seats can be won, the LDP may be on track for close to 300 seats. With New Komeito projected in the poll to gain 21 seats, that leaves the coalition close to getting across that two-thirds threshold. Halpenny believes that such an outcome of course would allow the LDP to overrule any Upper House objectives such as any legislation regarding the BoJ.

Halpenny feels that there are number of factors that will be important in determining the initial direction of USD/JPY on Monday morning. Firstly, the foreign exchange market now appears at least partially priced for a two-thirds majority and hence confirmation of this will help maintain the current yen selling momentum but failure to reach this may encourage yen buying to square short positions. Secondly, a newly elected Shinzo Abe as PM will have to quickly reiterate in strong words the rhetoric on BOJ policy and the yen that has been key to driving the yen weaker. A failure to do so would raise fears of a more conservative stance now the election is won and this would clearly drive the yen stronger.

He writes, “Given Japanese equity markets would fall, we suspect Abe will indeed make the required comments in order to maintain the current momentum. So we are at the mercy of the specific result and rhetoric from Abe in the initial aftermath of the election. Beyond then we still suspect that the market may soon come to realise that the process of change promised by Shinzo Abe will be long and complicated – and risks of a larger correction as yen short positions are squeezed remains high through year-end and into January. The BOJ may need to ease aggressively on 20th December to keep this move going.”