I have been caught by surprise by the Japanese yen's sudden volatility. In a week where there is not much economic news, I had expected a quiet week for the USDJPY. However, the surprise came from the political front during the debate between Japanese Prime Minister Abe and the Opposition.
We knew that the Opposition was fragmented but we didn't know that they would be so ineffectual as to hand over the whole debate to Abe. There are 8 opposition leaders and 1 Abe in the debate at the Japan National Press Club. The opposition had the advantage of Japan being in recession after the consumption tax hike which eroded the public confidence in Japan. However, they were unable to fend off Abe in economic issues and were overwhelmed.
The USDJPY was very volatile after the debate. It went from 119.13 to 118.07, a move of over 8.9% in the span of an hour. This can be seen the chart of the 15 minutes chart of USDJPY below.
This chart shows that a lot of stop losses were triggered upon Abe's shockingly good performance in the debate. Hence the cascading free fall down, but after the initial shock wears off, the market is rebuilding the long USDJPY.
Some of you may wonder why. The knee jerk reaction is for JPY strength because the market sees the possibility that Abe would win more seats than expected. He was essentially forced to call this election to secure the mandate to rule and impose the tax hikes and monetary accommodation. Basically, it's his brand of Abenomics that voters are increasingly weary about as the impacts of higher price and stagnant wages set in. The question is not if he were to lose seats at the Diet but how much seats he will lose after this election.
His strong showing at the debate may have tilted this election in his balance. However, even if he wins, he will be left with the difficult task of lifting the economy from its malaise with deeply unpopular measures economically. The opposition is unable to find an alternative to his economic measures and can only attack him on nuclear and military issues which are not the voter's priority now.
Suppose he wins back the majority of the seats in the Diet, he will also be forced to resume the task that he put on hold. His strong showing at the debate may have given investors a very short illusion that Japan is reviving economically. However, the fact is that his measures are going to weaken the yen a lot more before the economic recovery. We can witness this in the 2008 to 2014 recovery of the US economy. One can say that Japan is in the early stage of following in the US footsteps and have a long way to go.
So it was likely that the USDJPY would rebound back slowly to the previous resistance level of 118.80 before Abe's debate shattered the balance. However, it is also possible that the market would take a break off the recent strength in the USD. For conservative investors, it would be advisable to stay out of the market until there is greater clarity.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author is long USDJPY.