The upcoming election in Japan is expected to be a non-event, with markets complacent that Shinzo Abe will remain Prime Minister, noted analysts at Danske Bank. They see any action by the ECB as the catalyst for a move in EUR/JPY over the coming 12 months and target EUR/JPY at 132 in 1M, 135 in 3M, 140 in 6M and 145 in 12M.
Key Quotes:
“The Japanese economy is running on all cylinders and GDP growth picked up speed in Q2, with annualised growth of 2.5%. CPI inflation has also been increasing in 2017 but this has been due mainly to rising energy prices. Hence, the underlying price pressure in Japan remains very low, despite solid growth and a closed output gap and the Bank of Japan’s (BoJ) 2% inflation target is nowhere within reach.”
“Our main scenario is that the BoJ will keep its policy unchanged, maintaining the short-term policy interest rate at -0.1% and the 10Y Japanese government bond (JGB) yield at 0% over our 12M forecast horizon, assuming BoJ governor Haruhiko Kuroda is reappointed when his term ends in April.”
“The general election on 22 October looks much less of a competition than one could have feared (or hoped), as Tokyo governor and leader of the new Party of Hope Yuriko Koike decided not to run for parliament, which has resulted in a loss of momentum for the opposition. The latest polls project that Prime Minister Shinzo Abe’s LDP party and its coalition partner Komeito are likely to retain their two-thirds majority after the election, with the LDP winning more than 300 of the 465 seats according to some polls.”
“Financial markets seem complacent that Abe will remain Prime Minister after the election and there is hardly any election risk premium priced into the FX option market.”
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