David Kohl, chief currency economist at Julius Baer, looks at upcoming Japanese snap election.
Japanese Prime Minister Shinzo Abe is entering into a political gamble by calling snap election on 22 October. The timing is favourable given the solid economic backdrop in Japan, some improvement when it comes to corporate governance of Japanese companies and the military threat by North Korea which makes the rearmament of Japan which is on Abe’s agenda a sensible idea.
A fiscal expenditure package accompanying the elections campaign had been also announced shifting money away from debt reduction to education spending among other things.
After the most recent shift of the Bank of Japan composition towards a more dovish board the turn away from debt reduction is another yen bearish shift in Japanese politics.
The risk that the yen will be weaker than our current forecast of USD/JPY 111 has risen substantially. The geopolitical risk arising from North Korea sabre-rattling remains the main argument not to be overly negative for the yen outlook.
The currency tends to profit as a safe haven from rising geopolitical risks. Japanese snap election are accompanied by a shift to more debt financed fiscal policy and a dovish central bank deteriorating the outlook for the Japanese yen.