JPY: More of the same? – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that latest opinion polls from Japan are indicating that PM Abe is set for a resounding win at the weekend election and is not likely to have a significant impact on the direction of JPY. 

Key Quotes

“A Nikkei Inc. poll conducted between Tuesday and Thursday this week suggests that Abe’s ruling LDP Party, along with its junior coalition party Komeito, could capture 63.9% of the Lower House compared with 68.2% when the election was announced.  While this would be a little less that a super two-thirds majority, it would still strongly endorse Abe’s authority and set him on course for potentially becoming Japan’s longer serving post war prime minister.”

“For investors, a continuation of that status quo removes the potential of increased uncertainty on a variety of policies such as the future of nuclear fuel, Bank of Japan reform and the outlook regarding the expected sales tax hike in 2019.  Shortly after Abe announced the snap election, the creation of the Party of Hope by the popular Tokyo Mayor Koike, had unleashed talk of a populist shock in national politics.  Despite triggering the implosion of the DP opposition party as its right wing merged with the Party of Hope, Koike has not been able to draw voters in the same way as she did in her landslide victory as Toyko mayor.” 

“Part of Abe’s success in winning back popularity after a sharp fall in his ratings has been the perception that Japan needs a strong and seasoned leader to cope with the crisis related to N. Korea’s nuclear programme.  Abe has reportedly fashioned himself as a statesman with close links with President Trump.”

“Another factor supporting Abe has been economic success.  Japanese GDP has expanded for six consecutive quarters.  The recent publication of the BoJ’s Quarterly Tankan Report brought the highest reading for the manufacturing diffusion index in a decade.  The better performance of the economy has brought more focus on Japan’s fiscal policy and specificity its large debt.  Abe has confirmed another hike in the sales tax for 2019 “unless something happens on the scale of the Lehman shock”, even though his opponents say a hike will again have a significant negative impact on consumption.” 

“Despite its good economic performance, the economy remains plagued by slack wage inflation and a vulnerable consumer.  Despite an unemployment rate of just 2.8% and a jobs-to-applicants ratio at an incredible 1.52, real cash earnings rose just 0.1% y/y in August.  The reluctance of companies to share profits with workers has been linked with fear that the declining population will lead to a drying up of demand.   Even though this argument can be countered with the logic that slack wage inflation will itself result in weak demand, it seems unlikely that conditions in Japan will alter sufficiently to allow a spike in inflation in the near-term.  This outlook supports a continuation of easy policy from the BoJ.”

“Counter to the less dovish trends emerging for several other major central banks, the BoJ is showing no signs of backing away from its huge QQE programme.  The implication is that the carry trade should lift USD/JPY in the coming months.  That said, the JPY’s function as a safe haven has provided a counter balance on USD/JPY through much of this year.”  

“We don’t expect an Abe election victory to have a significant impact on the JPY.  On the assumption that general levels of risk appetite remain well supported we look for USD/JPY to maintain a slight upward bias.  However, any re-emergence of geopolitical tension could alter this outlook.  We has revised up our forecasts for USD/JPY slightly and look for a move to 1.15 during 2018.”