Japanese Elections and Shirakawa Replacement – Possible Impacts on Yen

Yen definitely improved a lot between July, 2007 and June, 2012. Things were going kind of steady; however, the tumble that it experienced last week (2.3% to USD and 2.5% to EUR) was definitely a big reversal affecting the Japanese economy. Yoshihiko Noda, the Japanese Prime Minister has already called for elections and to ensure that Yen doesn’t depreciate any further, option traders are paying record amount as premiums. Early exit polls indicate that Liberal Democratic Party, the main opposition will come into power. Incidentally, Shinzo Abe, the leader of the Liberal Democratic Party called for unlimited bond purchases by Bank of Japan. He also demanded the interest rates to be zero or even negative.

Masaaki Shirakawa, the Governor of Bank of Japan is going to resign from his post in April, 2013 after completion of his 5 year term. Many analysts believe that the replacement of Shirakawa will be a key factor in determining the future of Yen.

On the other hand, trade surplus, which has continuously been a big support for Yen, has started to erode. In the 6 months ending 30th September, Japan’s import is more than export by $40 billion. This is the biggest trade deficit in a fiscal half period since 1979 as confirmed by the Ministry of Finance.

The debt load on gross domestic products for Japan is now at 237%, which is the highest among all the developed countries, according to International Monetary Fund. For US, this is 107%. The 25-delta risk reversal rate ended last week at 0.89%. This indicator marks the implied volatility on similar puts and calls.

In the last 5 years, Yen has gained 36% against USD. This marks the highest growth for a currency, if all the major currencies are concerned. Many people have lost their fortune by betting against Yen and the Japanese exporters probably have suffered the most. An increase in Yen makes their products more expensive outside the country and hence their income gets diminished. In last February, a report was release by the Japanese Cabinet and it states that the exporters can stay profitable as long as Yen is at most at 82 per USD. However, many of the country’s manufacturers believe that the currency will stay around 79 per USD till March, 2013.

According to John Hardy, the Head of Foreign-Exchange strategy for Saxo Capital Markets, the market is now making a bet that this election is kind of a paradigm shift. He also stated that this is not about interest rates anymore. He added that the relative determination to devalue Yen competitively is the more prominent factor here. He also commented that Yen may fall further against USD and end up at around 90 per USD when 2013 ends.

Last year, Yen reached a record 75.35 per USD and the Government decided to enact 44 trillion Yen in asset purchases and interventions to combat that situation. Many companies sharply criticize Shirakawa for the deflation that Japan is facing. In the past decade, the consumer prices in Japan have fallen by 0.5% per month on an average.

Ahead of the replacement of Shirakawa and elections in the country, many are of the view that the currency will weaken further against Dollar causing the deflation to ease down. Under current situations, many investors may actually flip the short positioning in the Yen. Investors are already concerned due to the Greece debt and US fiscal cliff, hence, the upward pressure for the major Japanese currency is probably going to increase. According to analysts, in the last few months, Bank of Japan has taken some positive steps to combat that pressure and in the future, as the global economy may head back to recession, they have a proper stage to go for aggressive easing.