Shinzo Abe’s Liberal Democratic Party was the decisive winner in this weekend’s Japanese election, paving the way for a continuation of “Abenomics” and extremely loose monetary policy in the world’s third largest economy. Consequently, the Japanese yen weakened on Monday to levels above 114 per dollar for the first time since July.
According to the exit polls of local broadcasters, Abe’s LDP-Komeito Party coalition has won between 280 and 336 seats in the 465-seat parliament, thereby comfortably achieving a majority. A final tally of 310 seats or more will see the coalition retain its two-thirds “super majority.”
Party of Hope leader Yuriko Koike – Abe’s main threat heading into the election – has described the results as “very severe” and has suggested that parts of her campaign message had been taken negatively by voters. Speaking in a televised interview in Paris, Koike admitted that she might have “offended people” and said she would shoulder the blame for her party’s flop.
The yen weakened across the board as exit polls trickled in. USD/JPY’s aforementioned foray above 114 (a high of 114.09) took the pair close to the top of its recent range. For much of this year, the pair has traded in a large sideways channel spanning 108 and 114.5-115.
Despite heading into a significant resistance area, it seems reasonable to suggest that yen weakness will continue against the dollar over the short and medium term; analysts at Citi Bank, ANZ and Societe Generale said as much in September. The analysts said that Donald Trump’s proposed tax cuts would reignite the US reflation narrative in the fourth quarter and encourage carry trades generally, which involve borrowing yen at low interest rates and exchanging them for higher-yielding currencies or assets.
As with the dollar, as with the euro. Monday saw EUR/JPY reach as high as 134.12. By recent standards, the yen remains far weaker against the euro than it does against the dollar. Twelve months ago, EUR/JPY had been in the 112s. A breach of September’s high of 134.4 is possible this week and would take the yen to its weakest level against the euro in nearly two years. Movement in EUR/JPY will, of course, be driven in large part by the outcome of Thursday’s ECB meeting, at which the bank is expected to discuss tapering quantitative easing for the first time since the program’s introduction.
Another newsworthy yen cross is SGD/JPY. Monday’s rate of 83.7 marks the yen’s weakest level against the Singapore dollar in eighteen months. Barring a big miss in either of Singapore’s employment, inflation or industrial production data this week, SGD/JPY looks set for a move to 85 in the short term.
New Forecast for EUR/GBP
The euro will appreciate against sterling over the next year according to the team at Radobank.
EUR/GBP, which trades in the low 0.89s on Monday, will end the third quarter of 2018 at 0.95.
“It is our view that due to a slowing economy, the [Bank of England] will not be able to follow up a near-term hike with another one for some time. This factor combined will political risks suggests that GBP remains vulnerable,” explained the bank on Monday.