The landslide victory by Liberal Democratic Party (LDP) will likely smooth the path for more fiscal stimulus early next year, since the incoming Prime Minister Shinzo Abe is widely known to advocate “unlimited easing” by the Bank of Japan (BoJ). He aims to double the BoJ’s inflation target of 1% to end more than a decade of deflation. The LDP is expected to unveil between JPY5-10 trillion in spending as early as next month. This should result in further weakening of the JPY.
The USDJPY opened with a gap of 80 pips to the upside when the Asian market opened on Monday. I expect the USDJPY to rally further in the short to medium term since I believe Shinzo Abe will push his plans for more stimulus.
However, the Forex market is bigger than any government or central bank. Japan tried to weaken the JPY before. However, the market fought back each time and drove the USDJPY back down (JPY strengthened). In the long run the USDJPY may trade down again, since demand for the JPY as a safe haven will continue as long as global economic uncertainties remain.
You may also refer to my answer to “Question from Gary Low: Do you think the Japanese authorities are likely to sell off the Japanese Yen and buy other currencies e.g. the USD, EUR, etc.?” dated 9 August 2012.
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