Political uncertainty may drive down yen

Political turbulence could weigh on the yen’s value in the months ahead.

The financial sector was stunned by news that the incumbent mayor of Yokohama, supported by the ruling coalition as well as opposition parties, was beaten by an independent reform-minded challenger in Sunday’s election.

Apparently disillusioned by recent political scandals, the electorate delivered a stern no-confidence vote to domestic politics. The news also came at a time when market participants were bracing for investment activity in fiscal 2002, which began Monday.

The nation’s pension funds have publicized their plans to earmark nearly 3 trillion yen for new portfolio investment.

The question now is how much money Japanese fund managers and other institutional investors will funnel into foreign securities. Stepped-up purchases of foreign securities by the above always weigh on the yen’s value, relative to other currencies.

Attention has now shifted toward the Kyoto gubernatorial election, scheduled for Sunday, and Upper House by-elections in other prefectures later in the month.

Should any candidates backed by the Liberal Democratic Party lose again, doubts could emerge over the political future of Prime Minister Junichiro Koizumi.

A threatened delay in Koizumi’s structural reform program should prompt foreign investors to unwind their Japanese positions.

Credit-rating agencies would then downgrade Japan’s sovereign bond ratings, sending government bond prices lower and heightening fears that a broader “sell Japan” mentality could develop.

Although many fear a shift in the foreign-exchange policy pursued by the U.S., there appears little likelihood that Washington will abandon its strong dollar policy. The U.S. is counting on a strong greenback to help finance the bloated U.S. trade deficit.

Tokyo, for its part, is evidencing little urgency in terms of rescuing its own weak currency. Unless the yen’s decline threatens to spiral out of control, monetary authorities in Tokyo are unlikely to intervene.

All told, there seems to be a good chance that the yen will give up further ground, and will threaten the 140 line against the dollar later this month or shortly afterward.