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For the first time since the middle of June, the yen has firmed versus the USD. During that period, the yen slipped from 94 to the USD to over 101 - until yesterday. There are many reasons given for Wednesday's reversal.

We even heard the lame excuse that economic difficulties else where have resulted, once again, in the yen being elevated to a safe-haven currency. Sure, the country is stable, but parking your money in yen assets has resulted in a 10% loss this year. And the yen 10-year bond yields .85%, while the US was 2.62%. Again, not much appeal here either to hold the yen.

Part of the recent yen strength may be the result of poorer numbers coming from China. It was announced yesterday that both Chinese exports and imports were lower last month.

Others claim that Abe's plans have worked, the economy has responded, and the Bank of Japan, meeting this week, will back away from their expansionary policies. Conditions have improved as the weaker yen has helped Japanese exporters compete in global markets, resulting in a pick up of earnings and government tax receipts. The bullish stock market has also aided consumer sentiment, a consequence of the new policies.

Even Honda (NYSE:HMC) is opening their first new production line in Japan since 1990, though planning for this plant began far in advance of Abenomics; their next two new plants will be in Mexico and Thailand.

The economy has been slumping for decades, so is a 6 to 9 month respite from deflation really enough as some are claiming?

Abe has presented his recovery package as analogous to a quiver holding three arrows. The role of the first arrow is bring the inflation rate up to 2% by doubling the supply of money in two years. Next, the second arrow would feature a ¥20T increase in government spending.

To a degree, two of the arrows have been launched. Finally, there will be measures taken to empower the private sector. This is a longer-term goal. Can the private sector be given the reasons to grow the economy? The reduction in the corporate income tax level is a start. A proposal to make it easier for skilled educated people to immigrate into Japan, would be another positive reform, if passed.

July 21st is an important for the future of Abenomics. On that day there is an election for 121 open seats in Japan's 240 seat Upper House. Abe's party needs 63 seats to gain a majority. and with 72, a commanding majority. This would then give Abe a majority in both houses and would bode well for continuing with the Abe plan.

No doubt this election will impact the value of the yen. Currently, there are reasons for uncertainty about the future value of the yen. We know from the last COT report that specs are again loaded on the short side, a total of 103,631 contracts, so a good part of the bear yen case may already be priced in the market. As we get closer to election day, will any of these shorts chose to cover?

The opposition Democrat Party of Japan has been pointing out what they call the "unwanted side effects" of Abenomics, namely higher prices for necessities, fuel and food. Should this chorus become loud enough, this may scare current shorts.

We are inclined to buy the USD and sell the JPY (USDJPY, FXY) should there be a period of yen strength to the 98 range prior to the election. If the Abe win is decisive, a return to the 103/04 seems likely.

As always, watch you money.

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Source: What Is Next For The Volatile Japanese Yen?