It’s been five years since politics captured much attention from the foreign-exchange world in Japan, but traders are now gaming out potential scenarios for the yen after the Oct. 22 general election.
The consensus view is still for Prime Minister Shinzo Abe’s coalition to sail to a comfortable third-straight majority in the Lower House, ensuring years more of Abenomics and the weak yen it’s produced. Even so, the situation is more fluid than anticipated just months ago, with the sudden rise of new political parties that — with a plurality of voters undecided — could yet deal Abe a setback that calls into question his tenure at the head of his party.
The new Kibo no To (Party of Hope), led by Tokyo Gov. Yuriko Koike, hasn’t yet laid out the details of where it stands on monetary policy — saying it favors maintaining the nation’s unprecedented easing for now, but that it doesn’t want to rely too much on monetary easing and wants to work with the Bank of Japan on a smooth exit strategy. Many in the currency-strategy world assume that if Koike’s group gains major ground, it would strengthen the yen and hit Japanese equities.
“There’s basically a very strong notion among non-Japanese that Abenomics and the Abe administration weakened the yen, so if that’s perceived to be over, it will be shocking and apply pressure for the yen to rise and stocks to fall,” said Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co., and a former BOJ currency dealer.
The three-week dollar-yen risk reversals surged on Oct. 2, the day the tenor covered the election. The premium for downside puts had jumped, in a sign that investors were speculating on or hedging against the yen strengthening.
If Abe’s Liberal Democratic Party and coalition partner Komeito fail to secure a majority, the currency could climb to ¥105 to ¥106 to the dollar, Sasaki says. The Nikkei 225 average might decline below 19,000, from its 20,823.51 close Tuesday. But he doesn’t think that would start a new trend of yen strength and a drop in equities
Under the same outcome, Tatsuhiro Iwashige, chief foreign-exchange strategist in Tokyo at GCI Asset, an investment-advisory group, sees the yen soaring past ¥100 to the greenback. His rationale is concerns about who the next administration would pick to lead Japan’s central bank, given that Haruhiko Kuroda, who has overseen unprecedented “quantitative and qualitative easing,” comes to the end of his term in April.
If Abe’s coalition keeps its two-thirds majority, the Japanese currency could drop — though only modestly — toward around ¥114 to the dollar. The probability of this is already seen as high, according to Bipan Rai, Toronto-based senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce.
In the case of Abe losing significant ground, there could be a “second wave” effect after initial yen strengthening and equity losses, says Minori Uchida, head of global market research at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. Uchida thinks Abe’s focus will shift to stimulus, and a more competitive currency, with the yen going back down and stocks back up.
A shock win for Koike’s group — which would need to assemble a coalition with other parties as it’s not expected to field enough candidates to form a majority — would also eventually prove bad for the yen, Uchida says. A key Koike proposal is to ditch a planned 2019 sales-tax hike. That would hurt Japan’s sovereign rating and thus the currency, Uchida says.
Few see any lasting trends coming out of the election, with the yen continuing to trade in the relatively contained range it’s been in so far this year — mainly ¥108 to ¥115, with a high of ¥107.32 and a low of ¥118.60. The outlook for U.S. monetary policy may be more important for the currency, given that the BOJ is set to keep its near-zero target for 10-year government bond yields for some time to come.
“What’s currently leading dollar-yen direction is U.S. yields,” said Jun Kato, a senior fund manager at Shinkin Asset Management Co. in Tokyo. “It’s quite difficult to reverse that suddenly with yen buying on risk aversion based on Japanese politics,” he said. “There may be some impact but it’s not a long-term trend setting factor.”
Yet political shifts have had effects in the past. After the administration before Abe’s swept to power in 2009, indications that it planned no steps to counter a strong currency only fed the yen’s bull run. By 2011, it reached a postwar high of 75.35 per dollar.