USDJPY: Upcoming election may drive yields higher – TD Securities

TD Securities analysts Prashant Newnaha and Alex Loo discuss the implications of Japan's upcoming Lower House Election on fiscal policy and the USDJPY exchange rate. They expect that an absolute majority for PM Takaichi could lead to higher yields and a steepening curve, with inflation expectations potentially rising. This scenario is likely to push USDJPY higher as well.

Election impact on USDJPY and yields

"An absolute majority outcome should drive yields higher and the curve should steepen. To the extent this drives inflation expectations higher, USDJPY should track north as well."

"We expect buyers to emerge on yield back-ups as 1) the BoJ is likely to step in to stabilise the long-end through bond buying operations and 2) several Japanese institutions (e.g., SMBC, Meiji Yasuda) have indicated that they would be JGB buyers this year."

"All eyes are on the upcoming Lower House elections on Feb 8th. We are expecting PM Takaichi to secure an absolute majority. This outcome is likely to embolden her push for fiscal spending and markets are likely to drive JGB yields higher, lending a steepening bias, particularly to the 10y point."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)