Japanese Yen could see big moves

Next Sunday, elections will take place in Japan and a few days later the central bank will make a decision on the policy rate. On the currency markets, positions are already being taken for a major movement in the yen.

In the United States, the election battle between Kamala Harris and Donald Trump is almost at boiling point. But the vote in Japan next Sunday is at least as exciting. The big question is whether the Liberal Democratic Party (LPD) will manage to stay in power. Earlier this year, the LPD suffered a painful defeat in local elections. The party has been under pressure since a major corruption case came to light. Prominent party members pocketed part of the income from the sale of tickets for party demonstrations. A number of members of parliament have already been charged and for Prime Minister Fumio Kashida, the scandal was reason not to stand for re-election in August.

Between the lines
Kashida was succeeded by Shigeru Ishiba at the beginning of October, who quickly called for new elections. According to polls, the LPD will just miss out on a majority in the Lower House. The party currently holds 256 of the 465 seats. After a defeat, the LPD will not automatically end up on the opposition benches. There is a very good chance that, together with the socially conservative Kōmeitō party, it will win more than half of the seats. The currency markets are therefore already eagerly awaiting the economic course that Ishiba will actually adopt. During his campaign, he noted that Japan should pursue a normal monetary policy. Traders read this as a message that the policy rate can be raised.

Investment trick wears off
The Bank of Japan (BoJ) already cut that interest rate to below zero in early 2016 in the hope of stimulating inflation. Aided by a series of other windfalls, that now seems to be working. In September, inflation reached 2,5%. Earlier this year, the central bank already saw room to raise the policy rate by two steps. That was a bit of a shock for a number of market participants. Some investors have taken advantage of the very low interest rate in recent years by borrowing money cheaply in Japan, in order to then invest it in other countries at a higher return. If the BoJ raises the interest rate, that game works less well. Last summer, there was therefore a great demand for yen from parties that closed down their positions and repaid the loans.

Elections and interest rate decision The yen received a new boost from Ishiba's victory in the race for prime minister. However, it remains to be seen how he will implement his policy. Because at the beginning of October, Ishiba said that the Japanese economy is not yet ready for higher interest rates. Only to indicate a week and a half later that interest rate policy is a matter for the BoJ. On paper, Ishiba's economic plans are mainly focused on stimulating wage growth and investing in rural areas. First, we have to wait and see how his LPD will fare after the elections. A few days after the elections, the BoJ will meet again to discuss the policy rate. The bank will probably mark time, but hedge funds have already taken a position for a stronger yen. For the time being, the Japanese currency is facing turbulent times in every scenario.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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