Prime Minister Shinzo Abe will be hoping for a landslide victory to give him a strong mandate for his economic policies, which involve significantly depreciating the Japanese currency.
After hitting a seven-year intraday high of 121.85 on Monday, USD/JPY pulled back by around 3.6%. The pair has since eased some of the losses to hover around the 119 handle.
The market is largely watching to see if the ruling Liberal Democratic Party (LDP) and coalition partner can hold on to at least 270 seats ‘absolute stable majority’ of the total 475, compared with their current combined 326 seats.
Abe is widely tipped to win and a victory above the 270-seat benchmark could spark a further climb in USD/JPY.
However, one risk factor that could derail this scenario from playing out would be a poor turnout at the polls. This would make an election victory less indicative of public support and it could prompt some market jitters.
On a four-hour chart, USD/JPY is poised to break above the 20 day moving average (DMA), which will be a positive sign for upward momentum. This will likely see it test the 23.6% Fibonacci retracement level at 119.80, followed by the 120.00 handle. A potential support level is the 38.2% retracement level at 118.54.