Japanese Yen - Credible deterioration or castle building in the sky?

FXstreet.com (Barcelona) - The debacle of the Yen followed its course during Wednesday, a day in which the collapse in the value of the land of the setting sun currency kick-started very early in the Asian session.

The ball got rolling once the market realized that Japan's transitional shift from a 'trade surplus' to a 'trade deficit' country is accelerating at a much worse-than-expected pace, after showing a trade balance of ¥-549B (-Y360 bn cons) in October (YoY), with exports also falling 6.5%. Notorious was the loss of trading activity in China.

The market seem to find no end in sight when it comes to discount - through a much cheaper Yen - the expectations of drastic and unlimited easing by the BoJ once LDP opposition leader Mr. Abe wins the Japanese elections on December 6, an outcome largely expected as suggested by current polls conducted by Reuters and other Japanese-based agencies.

Mr. Abe has been unusually straight on his talk to the press so far. As Japan Times reported earlier this week, the politician is considering also making the Bank of Japan purchase construction bonds directly from the government, with the idea in mind to appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent.

Many people, including BOJ Gov. Masaaki Shirakawa's himself - term of office is set to expire next April - believe Mr. Abe's promises are fuelled by false expectations, and that it will be almost a fantasy to think Japan can climb from a long-held cycle of deflation to reach the ambitious 2-3% inflationary targets, at least in the foreseeable future.

As Adam Button, analyst at Forexlive, notes: "LDP leader Abe is promising the world and has convinced markets that he’s serious. Analysts are lining up to call for USD/JPY at 100 and higher. Today saw another 6 month high at 82.53..."

Market is now asking the following question... are false expectations also being built in the market, or is Mr.Abe really going to pass on his mentality of unlimited/powerful easing to the BoJ, forcing monetary-policy makers in the country to move from the notion of independence that stands behind the role of a central banker to one that is submissive to his future PM views...

In a recent interview to the Financial Times, current Japanese PM Yoshihiko Noda has stood by the independence of the central bank, calling any radical monetary easing policy to be well thought through before materializing.

From the Financial Times: “If this is done, could fiscal discipline really be maintained? I don’t know the details of the proposal, but from the essence of what I have heard I wonder whether Japan could endure it,” the prime minister said. “From the fiscal point of view, it is suspect.”

Bank of Japan Gov. Masaaki Shirakawa himself has been also reportedly adamant on the growing pressure for the BoJ to embark upon easing easing, urging Mr. Abe to respect the BOJ's independence. As Japan Times notes: "I seek respect for the BOJ's independence as it's doing its utmost to conduct appropriate monetary policy," Shirakawa said.

"Shirakawa said that unlimited money-printing could worsen the national debt and that a 3 percent inflation goal, also suggested by the head of the Liberal Democratic Party, would be unrealistic" Japan Times adds.

For now, there is a strong trend in place, and any contrarian trader with the guts to fight it might be up against a massive wave of buying interest that continues to support the Yen crosses's rally, one that interestingly, also has large specs jumping on the bandwagon, and as per the IMM positioning recently, with no much interest to abandon the boat just yet.

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