Today (12/12) the Japanese Yen remains stronger against US Dollar with USD/JPY traded at 118, down from 121 when market opened on Monday. It seems, the market is preparing for upcoming big move following Japan snap election on 14th December next week.

Today (12/12) the Japanese Yen remains stronger against US Dollar with USD/JPY traded at 118, down from 121 when market opened on Monday. It seems, the market is preparing for upcoming big move following Japan snap election on 14th December next week.

 

Huge GDP, Depressed Economy

For a small country, Japan wields huge influence as the owner of world's third biggest GDP. An interesting graphic by The Economist yesterday depicted how GDP in each region in Japan equals the GDP size of a single country. The GDP of Kanto, the richest region that includes Tokyo, equals to Brazil. Moderate economy Kyushu is as wealthy as oil-rich Iran, and even the poorest region, Okinawa islands, is at the same size as Guatemala.

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However, for more than two decades, economic growth remain dismal. It is as if Japan has reached its utmost height and unable to climb higher. At the same time, China has grown five-fold, and the US keeps growing steps by steps despite of several drawbacks here and there.

Escaping from lacklustre economic performance is not an easy thing to do. Various structural dilemma and conservative outlooks restrained Japan from going forward. Earlier this year, we have noted three issues that Japan ought to resolve in order to recover: stalled exports, falling population, and energy dilemma. In the months since then, there are so few improvements on any of the aforementioned sectors.

Japan

Exports rose due to the lower Japanese Yen, but current accounts and trade balance deficit is still going ups and downs. Japan shrinking birth and increasing number of older generation has not found any resolution, signalling fewer workers to drive growth and higher pension spending in the future. In order to close the gap, Japan needs to boost female labor participation and open their border for foreign workers. But freer immigration policy has not found stepping stone and even government efforts to encourage young females to work meet oppositions from within as it opposes Japan highly patriarchal society.

Still, there are hopes to be had at every opportunity. Energy dilemma receives reprieve these months due to the lower oil prices. In a forum sponsored by Nikkei in Tokyo, Bank of Japan chief Haruhiko Kuroda mentioned that lower oil prices benefits Japanese economy and will help prop up growth in addition to stabilizing prices in the long term.

In the same forum, although companies are rather unsatisfied with growth that was driven by cheaper Yen instead of true company performances, general views are reportedly sanguine about the current quarter prices. GDP growth that was in the red on the last two quarters too, is expected to get back on the right track.

PM Abe claims that cheaper Yen created by Abenomics will bring back growth are apparently not mere politician's empty promises. Investments are reportedly getting back to the country. It is evidenced by the plan of an Apple R&D facility opening in Yokohama and expansions of Toshiba and Canon domestic productions. Consequently, Abenomics is still being seen as the best alternative to reignite Japan economy.

Although the three arrows of Abenomics, that is stimulus spending, monetary easing, and structural reforms, are currently on suspension as Japan awaits next week's election, and smaller companies are still unable to benefit from Yen depreciation, but the direction of future policies are probably going to stay the same. PM Shinzo Abe's coalition is fully expected to retain majority in the Diet.

 

Absolute Win

Analysts and polls are generally estimate an easy win for the ruling coalition, but the number of seats that will be taken over by which side matters too. LDP and Komeito coalition in the dissolved house of representatives wields 325 of 480 seats, around two thirds of the house. In this election, even if they managed to get less than that, they still cound win with less than 300 seats, but it would mean that the ruling coalition will be shaken.

Quoted by CNBC, Makoto Yamashita from Deutsche Bank mentioned that analysts are looking for absolute stable majority where LDP/Komeito garner at least 270 seats. If the absolute stable majority is achieved, then all is well; but if it is not achieved, then PM Abe might have to compromise in advancing further Abenomics programs.

PMPM Shinzo Abe in a campaign in Tokyo, Japan

It needs to be noted that PM Abe decided to hold snap election in order to gather supports for his initiatives. Therefore, if voters are proven to be less enthusiastic, then it will reflect badly on Abenomics programs. Nomura, for instance, expect Bank of Japan would see losing seats as indication of public criticism toward Abenomics, including BoJ's own monetary stimulus.

Losing seats too, will reflect badly on Japan cheap Yen policies; while an absolute win will mean that Japan can continue to stand by the ongoing Yen depreciation with less opposition. Nevertheless, the ongoing opinion seems to side with an absolute win for PM Abe, weaker Yen, and bullish USD/JPY.

Ilya Spivak from DailyFX remain neutral on the Japanese Yen outlook this week and consider it unlikely for the election to trigger dramatic Yen response. As long as the status quo looks firmly set, he wrote, the whole ordeal will probably pass relatively quietly. Thus putting the whole ordeal back to external factors, mainly US economic news.

Meanwhile, Boris Schlossberg of BK Asset Management pointed out to USD/JPY increased volatility during the last rally and expects it to continue. The fundamental expert explained, The increase in the spread between UST and JGB yields will almost certainly increase the average daily range of the pair as it continues to attract more and more speculative flows.

As such, if you trade the Yen, next week could either be a fortuitous or a disastrous moment. Beside of Japan snap election that will be held on the 14th, there are Tankan report that is scheduled to be out on the same day, and Trade Balance report on late Tuesday/Wednesday in addition to a number of high impact news releases from the US.

 

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