(03 JULY 2017)DAILY MARKET BRIEF 2:Political upset in Japan

(03 JULY 2017)DAILY MARKET BRIEF 2:Political upset in Japan

3 July 2017, 13:53
Jiming Huang
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The global wave of populism has finally reach Japan’s shores. In an historic upset, Tokyo Governor Yuriko Koike's Tokyo Citizens First Party and its partners won a clear victory at Sunday’s Tokyo Metropolitan assembly election.

The political party, practically unknown outside of Tokyo. secured 79 of the government’s 127 seats and saw the LDP representations collapse to an all-time low of 23 seats.

The unprecedented outcome indicates that Japan is increasing frustrated with the PM Able administration and LDP leaders. Domestic issues such as Tokyo Olympic preparations, granting approvals of private schools and fast-tracking anti-terrorism legislations have all added up.

This serves warning that on a national level anti-Abe sentiment will further erode LDP support. However, the largest opposition force - the Democratic Party - is also suffering from weak approval ratings.

While the election results had minimal impact on financial markets, in the longer term this result will challenge Abenomics and the ultra-accommodating monetary policy driven by the BoJ.

A reversal of current policy would have a profound effect, as the strategy is critically supporting equity prices and keeping the yen weak. Should the BoJ further back off asset purchases and pinning the yield curves, the yen would easily rally higher pushed USDJPY towards 90.

Currently the ultra interest rate sensitive USDJPY will be driven by a shift in the US / JP rate differential. With Japan's rates stuck, it will be US short end yields that should push USDJPY higher. The market is currently underpricing the Fed commitment to higher interest rates including, what we expect, a 25bp rate hike in December. As US data firms and Fed comments support interest rate tightening, we target 114 with a fully priced-in December hike.

By Peter Rosenstreich

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