Photo: The Kremlin
It’s time for you to start getting fascinated by the Japanese election, which is taking place in December.For one thing, you probably have US election hangover, so this is a chance for you to get interested in another one.
Beyond that, Japan is the world’s third biggest economy, so it’s inherently important.
Furthermore, Japan might offer a glimpse of what developed economies may look like in the future (ageing, non-growing, zero population growth, etc.).
And then beyond that, the Japanese election features one candidate — former PM Shinzo Abe of the Liberal Democratic Party — who is running on an explicitly pro-QE, pro-inflation platform that is unusual.
We’ve been talking about this a lot the last couple of days, as an aggressive pro-inflation stance has the potential to break the back of the uber-strong yen, and finally unburden domestic Japanese manufacturers. Also, the Bank of Japan is considered to have a bad track record (when it comes to stimulating growth and beating deflation) so it will be an interesting experiment for the world to watch to see if a much more aggressive posture changes the game.
Already the Japanese yen is at 7-month low (against the dollar) and folks on Wall Street are betting on much more weakness to come.
Morgan Stanley’s just-released 2012 FX outlook is titled “2013: The Year Of JPY Weakness.” They write:
With early elections less than a month away, and with the current administration’s approval rating at depressed levels, popular polls show that the LDP’s Abe will almost certainly become Japan’s next Prime Minister by year-end. This will have large ramifications on FX markets, given how vocal he has been on defeating deflation and currency strength. Specifically, Mr. Abe is pushing for the BoJ to cut the benchmark rate to zero or lower, intervene in unlimited amounts, and adopt an inflation target of up to 3%.
Additional pressure on the central bank to act more aggressively should catalyze sustained JPY weakness, in our view. Indeed, the current structure of the FX market suggests that JPY weakness will beget further weakness. On the one hand, the Japanese private sector has amassed short-term external debt of roughly US$1.8 trillion. With little incentive to raise debt at higher rates abroad, this suggests to us that these positions are used to currency-hedge longer-duration USD investments. According to our calculations, the Japanese private sector is now almost fully hedged.
On the other hand, over the past two years, net portfolio inflows into Japan have been almost entirely in the money markets. With Japanese money market instruments providing no yield, foreign investors have bought these investments in the hope that JPY appreciation ‘pays the dividend’. As such, with the BoJ likely to engage in a much more aggressive easing stance, this should drive not only an unwinding of currency hedges, but also an outflow from the Japanese money market. We believe that the combination of these flows will drive JPY materially weaker – we target 92.00 next year.
As for the actual election, at this point, there doesn’t seem to be much doubt that Abe will win.
The Liberal Democratic Party has more than twice as much support as the Democratic Party of Japan, according to the latest Kyodo News survey.
The nationwide telephone poll conducted Saturday and Sunday also showed that Prime Minister Yoshihiko Noda has made slight inroads into the popularity of LDP leader Shinzo Abe.
The survey was conducted using calls made to numbers randomly generated by computer. A total of 1,754 eligible voters were reached, of whom 1,217 responded to the survey.
So this has it all. A big economy. A big election. A country at a crossroads. Big ideas about monetary policy. What’s not to be fascinated about?
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