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Japan election: what does it mean for stocks and the yen?

Prime Minister Shinzo Abe’s gamble paid off with the latest election result tilting in his favour. 

Japan Flag
Source: Bloomberg

For markets, this affirmation of continuity likely suggest that we may see an extended period to Abenomics and the current ultra-loose monetary policy under its three arrows.

Abe’s landslide win

Contrary to the election surprises we have grown used to, Japan’s latest snap election results had certainly been one aligned with polls. Alongside partner Komeito, PM Abe’s Liberal Democratic Party (LDP) coalition clinched 312 seats in the last update, surpassing the two-thirds majority in the 465 seat lower house. This automatically signals the mandate that has been given to the Prime Minister to push forth the array of policies championed by the coalition. Notably, this certainty in continuity was seen energising equity markets, sending the Nikkei to a fresh twenty-year high post results.

For the economy, the vote had been beyond politics as the trajectory for fiscal and monetary policies sat dependent on the results. On the fiscal end of matters, the debate centred the planned consumption tax hike with PM Abe’s victory equating a go ahead for the planned October 2019 sales tax increase. Despite so, fiscal policy had been seen turning more accommodative with a portion of the revenue channelled towards pre-school education for low-income families instead of being committed to meeting budget deficit needs in totality.

More importantly, the ultra-loose monetary policy would be one expected for an extended duration with LDP’s rule sustaining. Leading Bank of Japan’s (BoJ) monetary policy initiatives, Governor Haruhiko Kuroda may find himself with a reappointment after the end of his term in April 2018, or a succession by a candidate of similar stance. This would therefore leave USD/JPY free of monetary policy uncertainty in the medium term.

Yen pressures

With the absence of monetary policy changes, the Yen likely remains a barometer of risk sentiment. A look at the USD/JPY pair finds prices ticking up significantly of late, underpinned by the favourable election results. The passing of the political driver may return the currency pair to the influence of changes in yield differentials as higher US yields, fuelled by recent Fed chair speculations and broad growth optimism, remained evidently bullish for USD/JPY. Similarly, tightening expectations from the likes of the European Central Bank keeps the bias on the upside for EUR against the JPY into the year end. Do eye further upsides for USD/JPY with any clear break above the $114.37 resistance likely to bring out the bulls. Continue observing these technical levels in planning your trade.

Nikkei 225 rally at risk?

Meanwhile the Nikkei 225 had largely thrived on recent election optimism, receiving a further boost from early earnings surprises. While the projected JPY slide may provide support for equity prices, further upsides could be kept in check subjected to the turnout of subsequent earnings. Expectations had not been strong for rosy results with the stronger yen in Q3 threatening performances. This may place the raging rally at risk, certainly one to keep a close eye on.


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