Japanese Elections Capable of Bringing Short-Term Relief to Ailing Yen

The Japanese yen is poised to recover some of its recent losses if the country's ruling Liberal Democratic Party votes on Wednesday to elect the head of the coronavirus vaccination department, Taro Kono, as the next prime minister, according to a recent ING report. The bank sharply identified the most crucial factors underpinning the currency of the Rising Sun country. Taro Kono identifies himself as the fiercest critic and opponent of Abenomics – a term used to describe aggressive monetary and fiscal policies under former Prime Minister Shinzo Abe – and the least supportive of the Bank of Japan's continued monetary easing. So if he wins the election, JPY may find some important footing.

The Japanese yen is the G10 currency most correlated with U.S. two-year and 10-year Treasury yields. U.S. Treasury yields have surged since the end of last week after the Federal Reserve said it will likely begin tapering (reducing) its monthly bond purchases as soon as November and hinted that interest rate hikes may follow suit. Until then, rising oil prices and U.S. yields should keep the yen, which tested its three-month low overnight, weak, although 111.00 / 111.50 is likely the upper boundary of the short-term range for USD/JPY. The yen fell to 111 per dollar, revisiting its July 7 low.

The Japanese currency is falling following the rise in the 10-year US Treasury yield to 1.4660% in anticipation of the stormy events in Washington DC in October, including the current Congressional impasse on voting to lift the country’s limit of foreign borrowings known as the debt ceiling, the highest level since July 2, and also following the rise in oil and gas prices, as Japan is a net importer of fossil fuels.