Date: 23 Oct 2017

With Prime Minister Shinzo Abe securing a strong mandate to continue in office in Japan on Sunday, bank analysts have USDJPY in their sights again. Dutch bank ING argues that “Shinzo Abe’s call for a snap, early election has paid off, delivering his LDP party the two-thirds super-majority in the Lower House.” In ING’s view “this will allow the LDP to push ahead with its policy agenda of another consumption tax hike in 2019 and potentially reforms to the Constitution.” It is the Dutch bank’s contention that “the big win suggests another round of Abenomics, including the greater likelihood that Kuroda extends his term as BoJ Governor when it ends in April.” “With the prospect of US tax reform marginally improving, this looks like a pretty bullish environment for USDJPY.” ING feels that [Monday’s] “dip in USDJPY may be shallow – just filling the gap to 113.50 left in Asia, before a test of some good resitsance at 114.50.” Elsewhere, France’s Credit Agricole feels “USD/JPY continues to chase its fair value higher.

At last Friday’s close, our fair value estimate stood at 115.26, or around one standard deviation above spot – not enough to trigger a model trading signal but suggesting that USD/JPY still has room to rise following the outcome of the Japanese election. The fair value has been lifted by a combination of rising US 2Y yields, the steepening US yield curve and gains in the Nikkei.” US firm Morgan Stanley sings from a similar hymn-book. In Morgan Stanley’s view “this week’s focus will be on the USD with US 10-year bond yields trading near the 2.40% break point. A move beyond this technical resistance level opens upside potential to 2.54% which, in light of Japan’s election results, should push USDJPY up to 114.70.” Traders will make their own minds up but, with the Japanese election now out of the way and with markets not yet knowing how Abe will spend his political capital, may conclude that the direction of the USDJPY will now again be driven by US considerations.

Written by Neal Kimberley, External Currency Analyst.