When is the Japanese election and how could it affect USD/JPY?

On Sunday, October 22nd, Japanese citizens will be heading to the polls in a snap election, which was called by Prime Minister Shinzo Abe in early September. Two days before the election, Abe's Liberal Democratic Party (LDP) is enjoying a comfortable lead according to the latest projections and he is looking to become the longest-serving leader of Japan in the post-war era.

Key notes:

Although Abe explained that the reason behind the snap election was to obtain a stronger mandate to deal with the increasing threats from North Korea, many experts see it as an opportunistic maneuver that aims to take advantage of his recovering approval rating after the cabinet reshuffle in August and the primary political opposition's decreasing popularity. Earlier this summer, Abe's approval rating dropped below the 30% mark for the first time since his term started amid accusations of him using his political influence to allow the purchase of public lands with substantial discounts and to pressure the minister of education to approve the opening of a department at a university run by his friend. 

• Japan: Abe set for another term despite declining public support – Danske Bank
• Japan: It’s all about politics - Nomura

“Kyodo forecasts the LDP to gain 265-296 seats, which is slightly below its previous forecast (273-305). That said, its central case scenario shows the LDP can secure 281 seats, and with its junior coalition partner, Komeito, the ruling coalition is expected to secure the super majority," Nomura analysts noted in a recent report. In case Abe comes out on top as expected, the markets' focus will shift to the appointment of the next BOJ governor. "The risk of hawkish shift around the BOJ leadership change should diminish, which trims key uncertainties on JPY trading. Even though the immediate FX market reaction is likely to be muted, we think the recent political development is supportive to yen-crosses. The diverging monetary policy stance of the ECB and BOJ should remain EUR/JPY positive,” Nomura analysts further explained.

• Japan: Another victory for Abe likely – Nomura

Implications for USD/JPY

A sharp rally seen in the US Treasury-bond yields amid an improved market sentiment on the US Senate's 2018 fiscal year budget approval boosted the greenback on Friday, lifting the USD/JPY pair to its highest level in more than three months above mid-113s. Moreover, as a traditional safe-haven, the JPY struggled to find demand with major equity indexes in the U.S. pushing higher to fresh all-time peaks on the day. A decisive victory by the ruling coalition could trigger a relief rally and provide an additional boost to the pair in the early trading hours of the Asian session on Monday. However, the gains are likely to stay limited as this wouldn't be a surprise to the markets. 

On the upside, 114.50 (July 11 high) aligns as a strong resistance. A clean break above this level could allow the pair to stretch its upside to 115 (psychological level) and 115.50 (Mar. 10 high). Although it's unlikely, a surprise defeat could trigger a broad-based risk aversion and allow the JPY to strengthen against the greenback and other rivals as well. 112.55 (20-DMA) could be the first interim support on the downside ahead of the 111.30/40 region (100-DMA/200-DMA) and the critical 100 (psychological level).

• JPY: More of the same? – Rabobank
• Japan Elections: Look for a higher USD/JPY – Danske Bank