Will LDP defeat weaken or strengthen the yen?

The Japanese general election over the weekend saw a political shakeup with the loss of the ruling bloc's parliamentary majority, and Citigroup looks at the potential impact on the yen.

Prime Minister Shigeru Ishiba's ruling Liberal Democratic Party and its longtime partner Komeito failed to retain a majority in lower house elections on the weekend.

The LDP has governed Japan for almost all its post-war history.

An extraordinary session of the Diet will be convened within 30 days of the election to vote for a new prime minister, Citi said, in a note dated Oct. 28, “and we expect the ruling coalition to attempt to form a wider coalition with either the Japan Innovation Party (JIP) or the Democratic Party for the People (DPP). The Constitutional Democratic Party of Japan (CDPJ) is also likely to negotiate with other opposition parties to form a coalition encompassing both parties.”

At 09:20 ET (13:20 GMT), USD/JPY traded 0.3% at ¥152.70, having earlier climbed to a high of ¥153.88, its weakest since July, as investors figured the election result would hamper moves to lift interest rates further.

“We think there may be temporary upside to around ¥155/$ in coming weeks, depending upon the result of the US election,” Citi said.

“However, amidst recent changes in the Japanese political environment we think measures to ameliorate JPY weakness will become increasingly important, so we now see an increased probability that the BoJ will hike its policy rate at either the December or January MPM [monetary policy meetings]. 

“If the USD/JPY exceeds ¥155/$ there would again be the possibility of MoF invention to buy the JPY.”

 

Source: Investing.com