Analysts at Rabobank explained that Japan's PM Abe has pledged to resign if his LDP party and smaller coalition does not win 233 seats in the 465 seat Lower House after this month’s election.
Although success for Abe currently looks likely, there is a threat of an upset to the PM’s position from the nascent Party of Hope recently launched by Tokyo Mayor Koike.
At the end of September, the Democrat Party leader effectively disbanded the largest opposition to be absorbed by the Party of Hope suggesting that Abe may face a real test in the election. Not only could a change of government bring a suspension of the planned sales tax hike in 2019, but there is some speculation that a new government could be less supportive of QQE than Abe which could facilitate a change in the leadership at the BoJ next April. The latter could result in a stronger bias for the JPY medium-term.
On the assumption that Abe remains PM after the election, we maintain our forecast that USD/JPY will continue to pivot around the USD/JPY 112.00 level near-term, with near-term activity mostly dependent on the level of safe haven demand.
Medium-term we expect a slight upside bias to emerge in USD/JPY though this will be capped by our expectation that US yields will remain low in response to soft inflationary pressures in the US."
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