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This release has been pinned as pivotal for whether or not Abe continues with the second leg of the sales tax hike. However, there have been reports the sales tax hike will be delayed either way and Abe has already decided to shelve it for 18 months no matter how the GDP reading plays out.
One school of thought feels the GDP reading will not necessarily mean the economy can’t support another sales tax hike. Another maintains he’s hoping to dissolve parliament this week in order to hold a snap election in mid-December.
However, plenty of questions remain around the election situation, given Abe does not need to call an election until December 2016 and already has majority control over both the lower and upper houses.
Traders will be eyeing Japanese equities and the yen closely this week as we have the potential for a big move. USD/JPY printed a high of ¥116.83 on Friday and remains elevated despite a minor pullback. Whatever happens with the sales tax hike and/or election, it is likely to be a binary event. I feel we are approaching well overbought levels and there is a high chance of a near-term reversal.
Don’t forget we also have the BoJ meeting this week. Last week I ran a trade idea suggesting investors look at buying the Nikkei on pullbacks. I remain of the opinion that pullbacks will be a good opportunity to buy and will update trade parameters once we get a bit more clarity on this week’s key events.