What An Abe Win Means For Japan And The USDJPY

Includes: FXY, UDN, UUP
by: FXstreet

By Richard Lee

Official election results have been released and the world's third largest economy has yet another new prime minister - seventh in the last six years. Not only is the win a significant victory for the LDP party, but it also confirms that monetary stimulus is on its way. The new expansionary policies have serious implications when it comes to the country and its currency - the Japanese yen.

Election Results

Following the weekend's election, Liberal Democratic Party candidate Shinzo Abe returned his party to power - handing the opposition a crushing defeat. The LDP captured 61% or 294 spots in the 480 seat lower house of parliament. The victory was considered a landslide as the LDP was able to capture almost all 300 seats designated by popular vote.

Subsequently, the LDP victory leaves the DPJ (or Democratic Party of Japan) with only 57 seats, slightly above the minority Japan Restoration Party - which won 54 seats. The current situation now allows the LDP to override vetoes by the Upper House as the party boasts a required two-thirds majority in the Lower House.

Japan Policy Change

Given the parliamentary majority, the weekend's victory guarantees that newly elected Prime Minister Abe will be aggressive in putting forth his election platform. This means:

Raising the GDP Target - Abe, in an effort to eradicate deflationary pressures in the country, will likely move forward with his commitment of raising the country's growth target to 3%. Aggressive, the policy statement would require massive overhauls to the country's infrastructure policies - including a likely repeal of the sales tax increase.

Raising Inflation Targets - Prior to the election, PM Abe proposed an aggressive 2% inflationary target for the country, and will likely follow through on this measure. The benchmark would double the current BOJ target of 1% - set back in February of this year - and bring the country out of the current deflationary spiral.

More Stimulus - In order to achieve the 2% inflation target, Abe will continue to press the country's central bank in expanding monetary stimulus further. The battle is likely to escalate as the Japanese fiscal year ends early next year and will likely be at the sacrifice of the BOJ's independence as other politicians are likely to join the debate.

Technical Outlook

The new measures that are likely forthcoming will ultimately and bearishly affect the Japanese yen, particularly against the US dollar. Why? With an abundance of monetary stimulus on the way, further debasement of the yen is a certainty.

And, although a slight retracement to 83.04 fib support can be expected in the short term, upside in the USDJPY pair looks promising. Barriers at the 85.51 April 6th swing high is the likely medium term upside target, with a break higher shifting focus to the 87.67 exchange rate.

(Click to enlarge)

Source: FXTrek Intellicharts

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.