USD/JPY: Yen Plunges as Shinzo Abe’s Party Wins Election

The Japanese yen is foreseen to maintain its slump opposite the US dollar today as conservative ex-premier Shinzo Abe, who pledged more aggressive monetary policy, will get a second chance to lead Japan after his Liberal Democratic Party (LDP) surged back to power in yesterday’s elections. Projections showed that the LDP and its ally will hold a two-thirds majority of the parliament, potentially paving the way for the smooth passage of Abe’s policies. Meanwhile, demand for the US dollar is deemed to gain on buoyant manufacturing reports released last Friday.

Incumbent Japanese Prime Minister Yoshihiko Noda conceded defeat in parliamentary elections yesterday, clearing the way for the return to power of former Prime Minister Shinzo Abe. Projections by TV broadcasters showed that the LDP had secured at least 294 seats in the 480-member lower house, while its ally the New Komeito party took 31 seats. In contrast, Prime Minister Yoshihiko Noda’s Democratic Party of Japan (DPJ) received a painful defeat. It was forecast to win only 57 seats, less than a fifth of its showing in 2009 when it swept to power. Shinzo Abe had pledged to bolster Japan’s defenses in the face of a territorial spat with China while offering to boost spending on infrastructure at a time when much of the tsunami-wrecked northeast continues to recover. Nevertheless, the markets are focused on his strong vows to pressure the Bank of Japan into more aggressive policy easing measures in a bid to breathe new life in to the economy,

In his first official campaign speech in Fukushima, Abe focused on economic arguments, saying he would act to counter deflation, weaken the Yen and promote economic stability. He promised to tackle deflation, calling for “unlimited” monetary easing by the BOJ to achieve an inflation rate of 2 percent. He also prefers the central bank to buy government bonds to fund a range of public works to stimulate the economy. Abe’s central bank pledge has weighed on the Yen in recent weeks as traders bet that an LDP victory would hike the likelihood of more easing, and see the appointment of a like-minded BOJ governor after Masaaki Shirakawa’s term ends next year. The Bank of Japan next meets Thursday, and with Abe’s victory, further easing measure are increasingly looking likely. Analysts see the central bank a 10-Trillion Yen expansion of its asset purchase program. Considering these, the Yen is believed to weaken further.

In contrast, US factories revved up in November as manufacturers began to rebound from the damage inflicted by superstorm Sandy. Industrial output rose by 1.1 percent during the month, the largest increase in two years. Considering the contrast in sentiment, a long position is recommended for the USD/JPY today.

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