Summary:

  • LDP’s Abe is anticipated to achieve an easy victory in the Sunday’s election
  • Investors withdrew as much as $4.4 billion from Japanese equity funds till the past Wednesday ahead of the snap election this weekend
  • USDJPY approaches a key technical resistance, changes on the bond market help

The Japanese snap election will take place this Sunday after Japan’s PM Shinzo Abe decided to dismantle the parliament at the end of the last month in order to reinforce his grip on power. Even as there are little chances to be caught off guard, it’s worth looking at anyway as it could carry some ramifications for the JPY and the NIKKEI (JAP225 on xStation5) as well. The LDP’s leader and the incumbent Prime Minister Abe is broadly expected to gain the victory which seems to be confirmed by polls despite some concerns which occurred earlier this month when Yuriko Koike, the Party of Hope’s leader, sketched out her campaign promises. Let us recall that the Party of Hope is a new one at the Japanese political scene and was founded by her leader Yuriko Koike who was in an opposition until then. Although, the new party was able to win in the local election in Tokyo, it is very unlikely that it would be already ready to draw a required number of voters who would trust them.

Let’s pin down that the LDP rules the country in a coalition with Komeito as both parties have 2/3 of a total seats in the lower house. Taking into account that the total number of seats will be reduced by 10 to 465 after this week’s election, the LDP is likely to retain simple majority of votes but could be probably short of an absolute majority. If so, the PM Abe would gain a renewed mandate to continue its ongoing economic policy, however without an absolute majority a change of the constitution would be impossible and the LDP would need more coalition parties to do so.

By and large, a victory of the LDP could be seen JPY-negative as it would mean a continuation of the current ultra-loose policy which weakened the JPY and helped the Japanese stocks to climb to the levels not seen before the financial crisis. Nonetheless, equity investors seem to be more careful as they withdrew as much as $4.4 billion from Japan equity funds in the week to the last Wednesday according to EPFR Global which was the largest outflow since the group began tracking data in 2002. To sump up, even as Shinzo Abe is likely to sweep to victory as forecast by polls, some investors were more cautious given the past polls regarding elections in Germany, New Zealand, US or UK.

link do file download linkPutting all the above-mentioned together one could project that the USDJPY could be continuing its uptrend towards a crucial resistance at 114.3. Once this level is ticked, bulls may move higher to 115.8 where the next notable resistance line is placed. Notice that the bond market is still supportive of a rally on the pair. Source: xStation5