Japan polls unlikely to deliver Diet to beef up yen

LONDON: The yen should stay weak against the US dollar and other currencies as the Dec. 16 election to the lower house of Japan’s parliament, the Diet, is unlikely to deliver a result that re-ignites investor confidence in Japan.
As campaigning officially began this week, the latest polls show Japan’s opposition Liberal Democratic Party’s (LDP) lead has dwindled.
The LDP, led by former Prime Minister Shinzo Abe, may find that even with the support of its political ally, the smaller New Komeito party, a majority of seats in the lower house may prove elusive.
That could force the LDP, expected to win the biggest number of seats, to seek accommodation with the newly formed and right-leaning Japan Restoration Party, which ranked third in the most recent poll.
Given the Restoration Party’s call for more defense spending to protect Japan’s national interests, there may be further strains to ties with China that are already stretched by differences over disputed islands in the East China Sea.
It was the decision of Restoration Party senior party member Shintaro Ishihara, at the time governor of Tokyo, to try to purchase the disputed islands, known in Japan as the Senkaku and in China as the Diaoyu, that helped trigger the tensions.
There is therefore the potential for further strain on ties between Beijing and Tokyo that have seen Chinese consumers reduce their purchases of Japanese goods.
That would hardly be good for Japan or for investor confidence in the yen, which plumbed a 7-1/2 month low of 82.84 to the dollar on Nov. 22.
Not that yen weakness is likely to be an immediate concern of whichever government is ultimately formed. With Japan’s export-led economy contracting in the July-September quarter, a weaker currency should be welcome.
There is also the harsh reality that while the election covers the lower house of the parliament, a poll for half the seats in the upper house does not happen until July.
Given that no party has a majority in an upper house that has the right to block legislation, even more political horse trading in Tokyo will be essential.
With so many uncertainties surrounding the complexion of the next central government in Tokyo, let alone its capacity to enact measures that will address Japan’s challenges, the Japanese yen should stay weak.
A US dollar/Japanese yen exchange rate at 85.00 by the end of the year remains a real possibility.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.