- Japan’s ruling coalition facing worst election outcome in 15 years
- Result may lead to more expansionary fiscal and monetary policy
- USD/JPY spikes above 153 before partially retracing
- Click here for comprehensive USD/JPY weekly outlook guide
Overview
USD/JPY has surged in early Asian trade in response to the worst election result for the ruling Liberal Democratic Party (LDP) in 15 years, according to exit polls and preliminary results. With cost-of-living pressures a factor behind the result, new coalition partners may demand fresh stimulus measures, including pressuring the Bank of Japan (BoJ) to abandon policy normalisation plans.
For USD/JPY, the prospect of more expansionary fiscal and monetary policy points to upside risks, especially when rate cut pricing from the Federal Reserve continues to be unwound.
Election result may see more expansionary fiscal and monetary policy
Japan’s ruling coalition, led by LDP leader Shigeru Ishiba, looks set to lose its majority in the lower house of parliament following Sunday’s snap election. Exit polls suggest the Liberal Democratic Party (LDP) and its junior partner Komeito secured 214 seats, down from 279 in the last election. If correct, it will mark the worst result for the LDP in 15 years, reflecting electorate dissatisfaction over a string of scandals and rising living costs. Japan’s main opposition party, the CDPJ, may see its seat count lift to 148.
This result leaves Ishiba’s government in a difficult position, potentially needing to expand its coalition to maintain power. Possible partners include the Democratic Party for the People and the Japan Innovation Party. The election introduces uncertainty at a time when Japan faces significant economic challenges, including from inflation and uncertain international trade environment.
USD/JPY directional risks biased higher
As explained in this more comprehensive outlook report released over the weekend, even before the election result the price action in FX markets and US rate futures pointed to upside risks for USD/JPY. The outcome only bolsters this view, especially when Israel’s weekend retaliation against an Iranian attack earlier this month was modest relative to what could have been.
USD/JPY took out the high struck on Wednesday upon the resumption of trade, a move likely exacerbated by extremely thin liquidity at the time. It has since retraced some of the move, sitting around 152.90.
As seen in the chart insert of the hourly timeframe, near-term support may be found at 152.83 and 152.56, the latter a level that also acted as resistance at points over the past week. On the topside, the pair has now been rejected around 153.20 twice, making that a resistance level of note.
Zooming out to the daily timeframe, the price has bounced from the 200-day moving average on a couple of occasions over the past week, making that and 150.90 support two levels of note. Should resistance at 153.20 break, 155.36 may be the next target for traders.
-- Written by David Scutt
Follow David on Twitter @scutty
