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Noda Wins Election, Good For USDJPY?

It’s a done deal.

Following last week’s departure of embattled Prime Minister Naoto Kan, the reigning DPJ (Democratic Party of Japan) party voted Finance Minister Yoshihiko Noda as the country’s next prime minister.  The victory comes at the defeat of public front runners like Seiji Maehara.  Although Maehara maintained a high public backing, lawmakers cut the former Foreign Minister from the list in the first round – all but assuring a Noda victory.

So, what does this mean for the economy and its currency?

It means a steadier hand is moving into the government.  Minister Noda is a noted conservative (both domestically and internationally) and has already plotted out higher taxes to pay for the country’s nuclear disaster reparations, while cutting back on the public debt.  This is what separated him from runner up candidate Banri Kaieda.  Kaieda’s plan included issuing more debt to finance reparations, which would have compounded on last week’s credit downgrade by Moody’s Investors Services.  With plenty of cuts in funding and higher taxes, it means that austerity has come to one of the world’s largest debtor nations.

This could also spell disaster for the USDJPY currency pair.

Although Noda has been a prime opponent of an appreciating currency, his reputation and proposed plans are likely going to increase demand for the currency.  Since the US and European financial crises, the Japanese yen has strengthened against the US dollar on safe haven demand.  But, now, with a more responsible head at the table, the election results may increase demand for the country’s bonds.  Noda will likely refrain from issuing more domestic debt, increasing demand for the country’s short term securities.  This will likely boost the USDJPY currency rate in the long term as both short term yields and the currency do hold a direct relationship with each other.

Noda’s penchant for being responsible when it comes to the nation’s finances may also limit his ability to intervene in the market.  This would help the USDJPY currency pair break through current lows, placing targets well below current levels and on to a 73.00 exchange rate.