11 December 2014
Sales Trader, Client Trading Services, Saxo Capital Markets
As Japanese voters head to the polls this weekend in what is billed as a referendum on Abenomics, can Shinzō Abe win enough support to push through his controversial reform programme?
Much is at stake this week for Shinzō Abe and the future of Abenomics after the Japanese prime minister called a snap election in a bid to shore up support for his controversial economic reform programme.
Abe was only voted in as prime minister two years ago on a pledge to kickstart growth in Japan's ailing economy through a three-pronged economic reform programme that combined fiscal stimulus and monetary easing with deep structural reforms.
While Abenomics has showed promising signs of reviving Japan's stagnating economy, the programme has recently come under intense scrutiny from the Japanese public. The country fell back into recession this year, contracting by 1.6% in the third quarter of 2014 and by 7.3% in Q2, following a rise in Japan's sales tax.
The rate hike, from 5% to 8% in April 2014, was due to be followed by a second increase to 10% in November. However, this was delayed by Abe to garner public support and prevent the economy from collapsing. If re-elected, Abe is likely to be able to keep his promise of a delay, winning him many plaudits in Japan, particularly in rural areas where they have cited a significant drop in living standards due to the tax.Prime minister Shinzō Abe hopes his Liberal Democratic Party and coalition partner Komeito can clinch a two-thirds "supermajority" in Japan's lower house this Sunday. Photo: Shutterstock.Abe leading polls
Polls show Abe's Liberal Democratic Party (LDP) is on course for a landslide victory and suggest the process of rather dramatic reforms introduced by his government are set to continue. The opposition Democratic Party of Japan (DPJ) are predicted to lose seats in the election, allowing Abenomics to work with even more vigour than it has done before.
The polls are perceived as accurate, involving five Japanese newspapers with arguably the largest circulation across the country. Turnout, however, is expected to be at a record low with less than 59.3% of voters going to the polls.What does this mean for traders?
At first sight Sunday's vote appears to be a weak JPY story from both sides. Should Abe's LDP win more seats, reforms will lead to a further weakening of JPY as easing takes hold and deflationary problems reside.
Under this scenario, the party could begin 2015 with more than a two-thirds majority and pass reforms with limited opposition. Even if the end result of the snap election surprises and the LDP finds that it's power in parliament is limited, JPY could be sold as Japan struggles to implement the reforms that the governing party feels it needs.
Yet the election this Sunday comes at an intriguing time for yen traders. On December 8th, USD/JPY traded at a seven year high of 121.85, but has since moved back to around 118.0. Although it seems clear that Abe will remain as prime minister, there is without a doubt an air of uncertainty that looms.
On top of the election, there are key Federal Reserve and Bank of Japan meetings all occurring before Christmas. Perhaps the recent move from 121.0 to 118.0 is a dip or evidence of a more notable reverse in sentiment, only time will tell. Another point to note is that any change in sentiment towards JPY around this time of year may have a more pronounced effect than in other months. Liquidity is likely to become thinner as we head into the holiday season.
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