Snap elections and a weaker JPY

Every whisper or street rumour coming out of Japan is still being treated as fact by the market.

Source: Bloomberg

The belief that a snap election is coming continues to drive wild swings in the yen and local Japanese markets.

Japanese media has widely reported that the Shinzo Abe government could dissolve the Lower House and call a snap election by year-end. Despite several ministers denying this fact, the political sense coming out of Japan is that this scenario is very likely.

This news has further weakened the already free-falling JPY. With the BoJ’s surprise a few weeks ago now factored in (its decision to increasing its stimulus program to ¥80 trillion), the fiscal shake-up of a snap election will only drive this trade further.

The price action in the USD/JPY particularly is making a snap election the base-case scenario. The pair made another seven-year high today on talk from Japan’s Economics Minister Akira Amari that there are risks with delaying or proceeding with the second planned consumption tax risk to 10%. However, the likely conclusion is that not enacting it is more suitable than raising it for now.

This statement was briefly cheered by the currency (which saw it fall), but this quickly reversed and the Nikkei fell with it. Private firms have become increasingly concerned that further rises in the consumption tax will dent the current growth momentum and will do more harm than good, which explains the Nikkei’s reaction.

The postponement of the tax however is the most likely scenario, as I believe Mr Abe will call a snap election. It’s one of the fastest ways to shore up public support by reducing possible public tightening.

The decision on whether or not to go to the poll will likely to be made next week and here is why: Monday sees Japan’s Q3 GDP print; the final meeting of the panel examining consumption tax is Tuesday; media speculation is for the election to be held on Sunday December 14; and Mr Abe will need at least 21 days to call the election. Now, unless the GDP print quarter-on-quarter is a staging figure of 4% or more (consensus on Bloomberg is for QoQ to be 2.5%), he will likely postpone the tax until Tuesday and call the election in the three or four days after that.

What this means for the JPY is hard to judge as a new four-year term would give him more time to deliver his economic agenda, which could boost confidence and possibly the currency as well. Or it could see the perpetual concern of Japan’s ability to service its debt continue considering government debt as a percentage of GDP is 2455 (gross) and the postponement of tax hikes (the politically motivated call) will see the budget gap remain wide as a percentage of GDP in short further downside to the JPY.

Next week will be a major week for the world third largest economy and it will be a major driver of currency markets the world over.

Energy triangle

Energy and energy sustainability have been major talking points all week, with Japan’s desire to restart two of its nuclear power plants followed by China and the US agreeing to a deal to reduce greenhouse gas emission through to 2030. The effect this has had on the three major energy commodities in coal, oil and uranium has been dramatic.

The already depressed thermal coal price has fallen further in the past few days on the China-US emissions deal, which has forced the world’s largest producer of thermal coal in Glencore to suspend its Australian operations to reduce the mass over-supply in the market – the first sign the production war is coming to ahead. Coal is also likely to be a major issue for President Obama when he gets State side, after having seen the Republicans take control of the Senate and are looking to scale back the already proposed coal sanctions. Oil fell further on OPEC’s inability to work together around consumption and China’s industrial production number that came in below estimates.

Subdued oil demand and the supply increases over the past few months are likely to see energy plays further in the red with the likes of STO, WPL and OSH losing between 1.5% and 2.3% on the slide in the price overnight.

What is benefiting from the two news events of the week is uranium. Technically uranium is a zero emission energy  source; China is likely to look to uranium as a way to reach its environment goals laid out this week. Uranium itself has moved US$11 a pound in the past three weeks, with US$8 of that in the past week. More talk from Japan, China and the US about reductions in carbon emission is going to support uranium as its ability to create base-load electricity is greater with current technologies. Although not a key theme of the G20, carbon pollution will be discussed and this will further move the energy names.


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