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How does Shinzo Abe’s snap election victory affect the Yen?

November 2, 2017

 

 

A landslide election victory for Japan Prime Minister Shinzo Abe sent the yen down and
leaves equities in Tokyo poised to climb, with the path paved for a continuation of loose
monetary policy.


A “snap election” is an interesting phenomenon and one that is rooted in political strategy.
Essentially, it’s a premature election called by incumbent leadership and carried out in a
rapid fashion. For months, Mr Abe's popular support has been badly hit by a string of
scandals and unpopular policies. He denies allegations of cronyism and on Monday said
dissolving the lower house was not an attempt at avoiding those allegations.


For the yen, Abe's winning the elections means that the previous monetary policy carried
out by the BoJ will remain the same. In general, it's not good for the Japanese currency,
which has updated its four months' lows. The yen slid 0.3 percent to 113.85 per dollar as of
23 October 2017 at 6:31 a.m. in Tokyo. On the other hand, Japan’s Nikkei raced up 1 percent
to its highest since 1996. SMBC Nikko Securities estimates that Japanese corporate profits
overall will shrink 26.1 percent in the current fiscal year to next March 31 if the dollar
averages 100 yen.


Even retailers weren't spared. Japan's biggest retail group Seven & i Holdings saw its
quarterly revenue for the three months through May fall 3.2 percent from a year earlier,
with the stronger yen eroding revenue by 15 billion yen. Japanese automakers will take a hit
of around 17-18 percent to their full-year operating profit from the strong yen, according to
forecasts from analysts at Goldman Sachs and JPMorgan.


Mr Abe’s re-election has also unleashed a round of skirmishes within the government over
fiscal policy. During the election, he promised to raise consumption tax from 8 to 10 per cent
as already planned in 2019, but to spend half the revenue on free childcare and social
security instead of using it to cut the deficit.


It is a difficult task to accurately determine the extent of political fallout and its impact on a
domestic currency. Japan is unique in that the government has taken an aggressive role
towards monetary policy under Shinzo Abe.

 

 

References:
https://www.fxcm.com/insights/japans-2017- snap-election- affect-yen/
https://www.ig.com/uk/view-ig/2017/10/25/japan- election-- what-does- it-mean- for-stocks-
and-the- yen-- 40379
http://www.dailymail.co.uk/wires/reuters/article-3685698/Japanese- exporters-hurt- strong-
yen-threatening- fragile-economy.html

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