Corner: Risk of sharp rise in yen after House of Representatives election, warning of uncertainty due to Liberal-Kobe majority split

In the run up to the October 27 general election for the House of Representatives, tensions are rising in the foreign exchange market. The picture is an image of the US dollar and the Japanese yen. Taken in June 2022 (2024 Reuters / Florence Lo)

TOKYO (Reuters) – Tensions are rising in the foreign exchange market ahead of the general election for the House of Representatives on the 27th. Although the Liberal Democratic Party, which is facing political funding issues, is widely expected to lose seats, public opinion polls show that it is uncertain whether the Liberal Democratic Party will retain a majority as resulting in depreciation and risk aversion.

The dollar rose briefly to the 151 yen level in afternoon trading this afternoon, the highest level in three months. The yield on US 10-year bonds has risen to the highest level in three months, as expectations of a US interest rate cut have faded, and the market remains strong.

However, in the face of these price movements, participants are said to be quietly preparing for a short-term appreciation of the yen.

Japan’s general elections, which often uphold the policy of the previous government, have little direct impact on the yen exchange rate. According to Barclays Securities, the average rate of change in the dollar/yen pair the day after the eight general elections held since 2000 was 0%. Until now, the main opinion was that “the yen is not likely to move as a result of the general election” (foreign bank analysts), and many participants have focused their attention on the US presidential election.

However, in recent public opinion polls conducted by various media, the Sankei Shimbun reported that the LDP’s seats could fall below the majority, and Kyodo News said that the ruling party’s chances of getting a majority were “iffy”. , voices of warning about the risk of sudden and unexpected changes in the market have gradually become stronger.

If the ruling party falls below the majority, “the market may fall into temporary turmoil due to the unexpected result, and there is a risk of an increase in the tendency to sell stocks and buy yen to the number to reduce danger.” (foreign bank officials) also raise their voices.

In the currency options market, the expected volatility (implied volatility) of the dollar/yen for the week preceding the general election was in the 9% range, up from 7% last week, the lowest in three months. Risk reversal, which reflects the price difference between put and call options, also increases on the alert against a strong yen, suggesting that the number of risk-aware participants strong yen gradually increasing.

However, even though the number of seats won by the ruling party is falling below most and the stock market is declining and the yen is in turmoil, many believe that it will be a temporary response.

In response to the results of a series of public opinion polls, there has been widespread debate in the market about what kind of impact it will have on future economic and financial policy if the Restoration Party of Japan and the Democratic Party of Japan – into the coalition. government.

Both parties are currently wary of forming a coalition with the LDP, but the Ishin wants to lower the consumption tax rate and change the Bank of Japan Act, while the Democratic People’s Party advocates an increase wages and tax cuts, so if they join the coalition, it would have a negative impact on the economy. said Masafumi Yamamoto, chief foreign exchange strategist at Mizuho Securities.

Toru Sasaki, chief strategist at Fukuoka Financial Group, believes that if the ruling party’s seat count falls below a majority, there is a strong possibility that stocks will decline and the yen will appreciate for a short period of time. ‘ soon as a sign of political disgust. temptation

However, he analyzed, “Political turmoil could delay the Bank of Japan’s monetary tightening and accelerate the rollout of policies with a strong populist tone. As a result, the yen could weaken.”

Our code of conduct:Thomson Reuters “Principles of Trust”opens a new tab