USD/JPY: Yen Falls as Abe Takes Tough Stance over BOJ

With the Bank of Japan holding a two-day policy meeting today, the Yen is foreseen to weaken opposite the US dollar on views that the opposition party that backs more aggressive easing will emerge victorious in a general election next month. Prime Minister Yoshihiko Noda last week dissolved the parliament, which paves the way for elections that early polls will show that his Democratic Party of Japan will lose.

The BOJ is widely believed to stand pat on policy at today’s meeting as the board would likely prefer to see the effects of the actions taken in last month’s review. At the October 30 meeting, the central bank increased asset purchases by 11 Trillion Yen, announced a new lending program and signed a joint statement with the government to end deflation. Despite this, however, the Japanese currency is deemed to maintain its declines on comments made by likely next Prime Minister Shinzo Abe, head of the opposition Liberal Democratic Party.

At a gathering of media and business executives last week, Abe called on the BOJ to push interest rates to zero or below zero to stimulate lending, suggesting that he advocates greater influence over the BOK in efforts to turn around the flagging economy. Abe reiterated that the central bank should pursue unlimited easing of monetary conditions until prices rise. Last Saturday, he followed up by expressing that he would appoint as the next BOJ governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. He also said that he would consider making the Japanese central bank purchase construction bonds directly from the government to tame chronic deflation.

It remains uncertain whether Abe would maintain his tough stance in office, but his rhetoric on monetary policy and his pledges to help small firms who suffer from a strong Yen signify that he leans on the BOJ to do more. According to a recent nationwide survey, Abe’s LDP leads the ruling DPJ 25 percent to 16 percent. Hence, speculations of more aggressive action from the central bank to overturn the economy will likely weigh further on the Yen, warranting a long position for the USD/JPY today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.