Currency Analyst since 2010

JPY: future after the election

   By Mark Jensen

Japanese election came and went with no major changes on the nation’s political landscape other that Shinzo Abe will now have more time to seat in the Prime Minister’s Chair.

What’s next? There’s surely more Abenomics on the plate, but Abenomics isn’t just monetary easing.

The Bank of Japan will find itself under pressure on Friday: the markets will be watching whether Governor Kuroda manages to deliver a big quantitative easing surprise or a list hints on such in the coming months. At the same time, the bar is set very high: the BOJ increased annual bond purchases to about $700 billion in October and its balance now exceeds 50% of Japan’s GDP, so more easing won’t come easy for Kuroda & Co. Moreover, some members of the central bank see many risks in such excessive monetary stimulus. According to Reuters, the Bank of Japan is expected to keep monetary settings unchanged and offer a slightly brighter view of the economy. Kuroda may send a message that it’s now Abe’s turn to conduct reforms.

So, although the election results mean that Abe is now free to carry on the attempts to increase inflation via weakening yen, for now investors seem reluctant to buy USD/JPY above 120 yen.

Dollar/yen showed no positive reaction to Abe’s victory. On the contrary, the pair declined because of the general risk aversion which took hold of the market this week and boosted demand for the safe haven yen.

Before the BOJ’s meeting at the end of the week there will be another important event – the Fed on Wednesday. Our team doesn’t see potential for a much stronger USD on this event as we think that the Federal Reserve will have to be cautious – frankly, it has little options given the falling oil prices and low inflation.

A following conclusion may be drawn from all that I’ve said today: a deeper decline in USD/JPY is likely. I’m looking at the levels of 113.60 (50% Fibo of the Oct.-Dec. advance) and probably lower.

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