Landslide DPJ victory pushes Yen up
USD JPY
After 50 years of domination by the LDP, the minority DPJ party finally gains control in Japan. The party claims big changes to Japan, and the market reacted by punishing stocks and rewarding Japanese Yen. USD/JPY has weakened to the 93 figure as of this writing. Among the bigger promises are reduced spending and a reduced US debt accumulation (Treasuries).
Predictions abound that USD/JPY will continue to weaken since Japan may not support US assets at the same rate as before. The reasons for Yen appreciation against the Dollar are not entirely convincing yet. One must realize a lot of this is political talk and markets usually don’t change at the speed of political words- rather, they move fast when big positioning imbalances give out.
The fact that big exporters like Toyota weakened on the news isn’t good for the Yen. Any sustained Yen strength (i.e. below 90) is bad for the Japanese economy because it is still not out of the woods yet. Even though the party has expressed that it doesn’t care as much about the strong yen affecting the economy, the Ministry of Finance (who instructs the BOJ on whether to intervene) is an independent administrative institution.
It would be best to wait out this scenario to let traders show their hand. If price ventures lower and gets rejected, that’s a powerful indicator that not much force is supporting the Yen. Of course if there is a sustained downward push and the market has adopted this view, there may be a nice long-gamma, short USDJPY opportunity.
