How Does Japan’s 2017 Snap Election Affect The Yen?

On 25 September 2017, Japanese Prime Minister Shinzo Abe called for a "snap" election to determine the makeup of Japan's Lower House of Parliament. The election day was set for 22 October 2017, more than a year earlier than previously scheduled.^[1] A victory in the special election would make Abe Japan's longest tenured leader since the pre-World War II era.

The result of the election may have a considerable impact upon the Japanese yen (JPY). Over the course of his five-year run as Prime Minister, Abe has been viewed by investors as a friend to the weak yen. Through his approach to foreign trade and domestic monetary policy, known as "Abenomics," currency devaluation has been the preferred method of bolstering economic growth.

Analysts are in agreement that Abe and members of the Liberal Democratic Party (LDP) are the favourites to prevail in the upcoming election. However, in the event that there is a surprise outcome, the JPY is likely to experience enhanced degrees of volatility.

Timeline For The Election

A "snap election" is an interesting phenomenon and one that is rooted in political strategy. Essentially, it's a premature election called by incumbent leadership and carried out in a rapid fashion.

In comparison to the electoral cycles of many developed nations, the timeline of Japan's 2017 special election is severely condensed:

• 25 September 2017: Shinzo Abe announces special election
• 28 September 2017: Japan's Lower House of Parliament was dissolved
• 10 October 2017: Official campaigning begins
• 22 October 2017: Election is held

The entirety of the election season will be conducted inside of one calendar month. With active campaigning only consisting of 12 days, a major strategic edge will go to Abe and the firmly entrenched LDP.

Why Did Abe Decide To Call The Snap Election?

Citing "national crisis" as being a compelling reason for the unscheduled election,^[3] Shinzo Abe chose to dissolve the Lower House of Parliament and set up a late-October contest for Japan's Prime Minister seat.

The move is not unprecedented, because in 2014 Abe did much the same thing, ordering a snap election for December of that year.^[4] It was a success. Abe's party won a landslide victory that secured 326 of 475 seats in Parliament's Lower House.^[5]

Abe's claim of a "national crisis" facing Japan is multifold. North Korea's extensive nuclear and ballistic missile testing, as well as growing concerns over the domestic social security program, are thought to require immediate attention. In response to these issues, Abe has stated that he will demonstrate "strong leadership and stand at the forefront to face the national crisis."^[6] In order to aggressively address these challenges, the 22 October election was called.

The consensus among political analysts is that Abe called the election due to a bump in poll numbers and disarray among competing parties. A timely implosion of the main opposition Democratic Party, coupled with positive polling data reflecting a boost from 30% to 50% in Abe's approval ratings, are widely accepted as reasons for the snap election call.

Who Can Win? Possible Outcomes

Parliamentary elections are not all-or-nothing, because power is distributed throughout the elected body. Obtaining either a majority or supermajority guarantees the prevailing party a firm grip on legislative power.

For the upcoming election, there will be three primary factions vying for control of Japan's Lower House of Parliament^[8]:

• Liberal Democratic Party (LDP): Led by Abe, the LDP has been in power for the past five years, promoting fiscal stimulus and subsequent currency devaluation. Goals of the LDP for the immediate future are the revitalisation of military armaments from post-World War II directives and raising the consumption tax from 8% to 10%. In addition, an extensive restructuring of social programs that address child birth and senior welfare are being promoted.
• Party Of Hope (POH): The Party Of Hope is a newly formed faction created in the wake of Japan's Democratic Party's dissolution. Led by the governor of Tokyo, Yuriko Koike, the POH is focused on freezing taxes, reexamining the Bank of Japan's monetary policies and ending the use of nuclear power by 2030.
• Constitutional Democratic Party Of Japan (CDP): The CDP is also brand-new, formed in the wake of the Democratic Party's destruction. It is a center-left platform that aims to garner support from voters not pleased with the LDP or POH.

A simple majority is needed for the LDP to achieve Abe's stated goal of 233 seats. Before the dissolution of the Lower House of Parliament, the LDP controlled 287 seats and the Komeito (the LDP's affiliated party) held 35 seats.^[9]

With a two-thirds supermajority in hand before the decision to prompt the special election, Abe is under considerable pressure to maintain the pre-election control of Parliament. In the event that the POH or CDP outperforms expectations, official calls for Abe's resignation as Prime Minister may come to fruition.

The result of the election remains unclear. Upon Abe's announcement for the snap election, a Nikkei Business Daily survey showed 44% favourability for the LDP, 8% for the Democratic Party and 8% for the POH.^[10] This set of polling data is largely in favour of the LDP holding control of Parliament, yet the dissolution of the Democratic Party may bolster the popularity of the POH.

While the LDP looks to be out in front, holding the majority or achieving a supermajority may prove to be a formidable challenge.

Abenomics And The Japanese Yen (JPY)

"Abenomics" has been the economic policy adopted over Shinzo Abe's five-year reign as the Premier of Japan. Upon his election in 2012, Japan was deep in a recession, dealing with the stress created by decades of stagflation.

In the immediate post-2008 global debt crisis environment, the yen had become an international safe-haven currency while Japanese equities faltered. The sudden spike in the yen's value was detrimental to the Japanese exports sector, which represents over 17% of its annual GDP.^[11]

In order to address the challenges posed by a strong yen and stagnate economy, Abe introduced a three-pronged plan to restore economic vitality. Known as "Abenomics," the plan made the following reforms to select areas of the Japanese economy^[12]:

• Monetary Policy: A reduction of real interest rates and an increase in the projected inflation rate were undertakings managed by the Bank Of Japan (BOJ).
• Fiscal Policy: A policy of quantitative easing was adopted and executed via an extensive stimulus package. For 2013 alone, 10.3 trillion yen were injected into the economy.
• Structural Reforms: Participation in the Trans Pacific Partnership (TPP) and the elimination of red tape towards foreign trade were encouraged. Expansion of the healthcare industry and a reduction of regulations facing many sectors of the economy were also enacted.

The impact of Abenomics was felt immediately in both Japanese equities and the yen. For the year 2013, the Nikkei equities index rallied 57%^[13] while the JPY posted a 21% annual loss against the USD.^[14]

Going into the October 2017 election, the yen is in a position to be dramatically impacted. Abe's commitment to a policy of currency devaluation to bolster growth in the export sector and the economy as a whole is well documented. Competing parties such as the POH have voiced an opposition to this idea, citing the need for a stronger yen to bolster domestic wealth and social welfare.

Additionally, Haruhiko Kuroda's (chairman of the Bank Of Japan) term is up in April 2018. Kuroda has been a supporter of quantitative easing, promoting an annual inflation target of 2% since election in 2013.^[15] Kuroda is seeking a second term, but if the LDP is not in firm control of parliament, a new BOJ chairman is likely to be elected.

In the event that the LDP does not achieve a majority, the yen may be poised to rally considerably against the world's major currencies. Investors are likely to interpret the upset as a rejection of Abenomics with favourability shifting to the idea of restoring the JPY as a safe-haven asset.

JanapJapan Snap Election copy update (note: this will all be placed at the end of the article, right before the existing "Summary" section)

Election Returns

Japan's snap election on 22 October 2017 produced an overwhelming endorsement of Shinzo Abe's leadership. Amid inclement weather and Typhoon Lan bearing down on mainland Japan, Abe and the LDP secured firm control over the Lower House of Parliament.

With 53.69% of the voting public casting ballots,^[16] the LDP and affiliated party Komeito won 312 of a possible 465 seats. The margin of victory afforded Abe and the LDP supermajority status within Japanese Parliament.

The results of the election position Abe to be Japan's longest tenured prime minister in the post-World War II era. In statements made immediately following the election's result, Abe cited "earning powerful support of the Japanese people," as well as the need to "face this victory with humility."^[17]

Impact On The Yen

The yen experienced considerable volatility immediately before and after the election's outcome became known. In anticipation of a resounding Abe win, traders and investors were active in the currency markets just ahead of election day. On Friday, 20 October, the yen experienced sustained pressure against many of the majors:

Monday, 23 October brought further depreciation to the yen before entering correction. For the subsequent week after the election (23-27 October), the JPY posted a formidable recovery:

Concerns over an LDP and Abe victory drove investors to initially take a bearish stance towards the valuation of the JPY. The likelihood of more Abenomics, coupled with the Bank of Japan's (BOJ) commitment to a policy of quantitative easing, bolstered the potential of a long-term devaluing of the yen.

Ultimately, it is difficult to determine the future course of the yen. However, with respect to Japan's economic dependence upon its export sector, the advantages related to a relaxed monetary policy all but assure its relative weakness across the majors.

The Future Of Policy

Enjoying supermajority status provides the LDP and Abe the ability to pursue several items on their political agenda. Numerous issues came to the forefront during the election, and are widely seen as determinants of the final result:

• Success of Abenomics: When Abe took office in 2011, Japan's economy was struggling. After a major earthquake and three consecutive quarters of negative growth, Abenomics was introduced as Japan's new economic policy. Although the success of the plan is debatable, Japanese unemployment is at a 23-year low, GDP has grown by 2.5% for 2017 and the Nikkei 225 has doubled its value.^[18] According to these metrics, Japan's economy has undergone a robust recovery under Abe's policies.
• Remilitarisation: Abe has stated a desire to amend the Japanese constitution to allow for rearmament of the domestic military.^[19] In the wake of tensions with North Korea and the nuclearisation of the Korean peninsula, voters have given Abe's case for remilitarisation validity.
• BOJ Kuroda: BOJ Chairman Haruhiko Kuroda is expected to receive a second five-year term as the BOJ's head.^[20] Kuroda has been a staunch supporter of aggressive quantitative easing. If a second term is awarded to Kuroda, a relaxed Japanese monetary policy is expected for the extended future.

It is an arduous task to predict the impact that more Abenomics, remilitarisation and another term for BOJ Chairman Kuroda will have on the yen. The results of the election have shown Japan's voting public to be optimistic over the prospects of each. Undoubtedly, traders and investors will be watching the currency's performance very closely for many years to come.

Summary

It is a difficult task to accurately determine the extent of political fallout and its impact on a domestic currency. Japan is unique in that the government has taken an aggressive role towards monetary policy under Shinzo Abe.

No matter how predictable the outcome of an election may look to be, unforeseen surprises can occur. For example, both the 2016 U.S. Presidential election and the U.K.'s snap election of early 2017 produced results that stumped political experts. Ultimately, Japan's voters will determine which party or parties control the Lower House of Parliament.

If the LDP does not secure at least a majority, the yen will experience enhanced short-term volatility. Questions surrounding Japan's ability to sustain economic growth through its export sector amid a strengthening yen will most certainly cause traders and investors to reevaluate the entire situation. While the market turbulence will eventually subside, an indictment of Abenomics by the electorate may be the precursor for a positive long-term outlook towards the yen.

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Past performance is not an indicator of future results.