JPY: Election campaign begins today – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, points out that the USD/JPY remains firm at ¥112-113s but has been unable to break out of its recent range.

Key Quotes

“The USD/JPY market has been bullish since remarks last month by the Fed chair led to a renewed appreciation of the US economy's strength. The rate tried the mid ¥113 level on Friday despite the hurricane-related drop in non-farm payrolls in September, reacting instead to the sharp rise in wages. However, it fell back due to North Korean concerns. Without the North Korean cap, we believe the fundamentals would dictate a rise to over ¥115. We expect this situation to continue for a while.”

“Domestically, official campaigning for the Lower House election on 22 October kicks off today. The various parties have disclosed their platforms, and talk sessions of key party heads were held over the weekend. Tokyo Governor Yuriko Koike, who founded the Party of Hope, announced no plan for her to go for this national election. Not a few voters have been a bit disappointed at half-done manifesto of the Party of Hope and recognizing the similarity between the political positions of her party and the LDP. A Yomiuri Shimbun poll of 7-8 October found that 32% of voters in proportional representation districts support the LDP (28-29 September poll: 34%) while 13% back the Party of Hope (19%). The popularity of the Party of Hope has thus retreated somewhat.”

“The core scenario easiest for the markets to discount is thus (1) the LDP-Komeito coalition retains its Lower House majority; (2) Prime Minister Shinzo Abe remains in office at least through next September's LDP leadership election; (3) fiscal and monetary policy remain accommodative; (4) constitutional reform during Abe's reign becomes a more distant prospect due to the LDP's loss of seats, but the outlook improves with the overall growth in conservative forces like the LDP, Party of Hope and Japan Innovation Party; (5) the conservative groups mainly from these three parties might be reorganized in near future.”

“Abe says that he will continue to lead the coalition if the LDP and Komeito Party retain a 233-seat majority. The risk is a weakening of Abe's clout within the party depending on the scale of the LDP's loss of seats and a return of his health problems due to related stress. We believe that risk would begin to increase if the LDP loses between 44 seats (dropping it below a stable majority) and 55 seats (dropping it into the minority).”

“We cannot rule out a change in the credibility of the various parties as the campaign progresses toward the 22 October vote. In the bond markets, the risk balance is toward a rise in yields, making investors sensitive to the consumption tax and the post-Kuroda BoJ leadership. They should thus be fairly sensitive to election news. However, we feel the yen and equity markets are unlikely to react dramatically as long as the present situation continues. If Abe should step down, we would expect a brief appreciation in the yen and downturn in the stock markets, but do not believe this would be long-lasting.”