Japan election: Expected Abe gamble likely to pull off a win – Short JPY bias intact until 22 Oct

Japan election: Expected Abe gamble likely to pull off a win – Short JPY bias intact until 22 Oct​

  • Strategy implications: Expectations for snap elections had already begun to be priced-in since early September, but there is still room to run the short-JPY trade. Expect further JPY weakness through 22 October (target: 114-115 to USD) insofar as polls reinforce expectations of a wider (68%+) LDP parliamentary mandate. The recent bout of global equity-driven risk aversion may offer an entry opportunity to initiate below 200dma (111.50). Take profit prior to elections. Weak-JPY expectations are also anchored by a tactical bullish USD bias and unchanged BOJ policy (now that minutes are out of the way, with no major changes). North Korea can’t be ignored but its impact on JPY may be more ambiguous than in the past: Whilst DPRK provocation is bullish-JPY, markets are now less sensitive than 2mths ago (hence higher bar now to significantly impact markets) yet persistent nervousness around North Korea is likely indirectly to be a positive for Abe continuity (bearish-JPY). Instead, I would focus on the following key risks to a weak-JPY view: 1/ LDP lead is chipped away by Ms. Koike or a potential unified opposition (watch polling data), 2/ Any signs of LDP infighting, 3/ Abenomics confidence/credibility are tested on either monetary/fiscal policy fronts (e.g. resistance to another VAT hike via consumption/wage concerns, opposition intensifies on BOJ market distortions) and 4/ If external global risk aversion (via extended global equity sell-off) intensifies and spurs yen short-covering (risk is heightened by current/longstanding consensus short JPY positioning).

  • What’s new?: PM Shinzo Abe announced today (25 Sep-17) that he would dissolve parliament later this week, framing the election as a vote (“test of confidence”) on two key issues: 1/ Hard-line stance on North Korea and 2/ Plans to use a VAT hike to fund an $18bn-stimulus package. A Nikkei poll (25 Sep-17) showed Abe’s LDP received 44% support vs DP (8%) and upstart Tokyo Gov. Koike-led group (8%). A Kyodo poll (24 Sep-17) showed LDP with 3:1 margin vs closest opposition rival, though 42% are undecided.

  • What’s next?: Most expect voting will be set for 22 Oct. It is unclear how important constitutional reform would play during the campaign but there is widespread acknowledgement that Japan must beef up its defences over the medium-term, which is positive for Abe's agenda. Polls (Gnews) suggest Abe’s LDP will expand on its two-thirds parliamentary majority; anything but would be a disappointment and could prompt the LDP to oust him in a party leadership vote next year. Some LDP party members have recently questioned the urgency to hold snap elections one year before the term expires.

  • What’s the context?: Abe’s expected snap election is capitalizing on a rebound in his popularity since it sank to a multi-year low earlier this year – largely due to conflicts-of-interest scandals – and manifested itself in losses in the Tokyo elections (Jul-17). The rebound is attributable to a strong stance vs Pyongyang as well as ongoing steady improvement in the economy. Abe’s LDP controls two-thirds of the parliament (323 or 68% of 475-seat LH, including 35 seats from coalition partner Komeito – though total LH seats are expected to be cut to 465 in the next election as part of a reform aimed at reducing the weight currently given to rural votes). The opposition DP is weakened by infighting but Tokyo Gov. Yuriko Koike (Wiki, Gnews) said she would lead an alternative political group called “Party of Hope” that is expected to run on ‘good governance’ theme of empowering women, improving transparency, reducing the number of lawmakers/their wages. Within the LDP, Abe’s main challengers include Shigeru Ishiba (lost to Abe in 2012, Wiki), Fumio Kishida (LDP policy chief, Wiki) and Internal Affairs Min. Seiko Noda (Wiki).

  • Reference: “Abe approval ratings” (Gnews), "Yuriko Koike" (Gnews)

  • Visuals:

#japan #jpy

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