Yen Catches a Bid as Political Scandal Places Question Over Future of Abenomics

© Andrey Popov, Adobe Stock

The fallout from the scandal could mean the end of Abenomics one of the prime drivers of a weaker Yen.

The Japanese Yen was a winner at the start of a new week as it too now feels the influence of political uncertainty. However, unlike other currencies that would tend to drop when political tensions rise, the Yen is finding itself supported

Japanese finance minister, Taro Aso, is coming under growing pressure to resign from opposition politicians amidst allegations his department covered up the involvement of key figures of the Abe government in the cut-price sale of public land to a nationalist school, called Moritomo Gakuen. 

The school has links with Shinzo Abe's wife.

"The USD traded slightly softer during Monday’s Asian trade. The main highlight in an otherwise quiet trading day was a 0.4% decline in USD/JPY to 106.51 on a deepening political fallout over Japanese Finance Minister Taro Aso’s alleged involvement of favours to a school with connections to Japanese Prime Minister Shinzo Abe," says Richard Grace, Chief Currency Strategist at Common Wealth Bank of Australia. 

GBP/JPY traded at 147.91, up 25 basis points from the morning's open price of 147.66. Other major pairs like USD/JPY and EUR/JPY meanwhile faired less well and declined as the Yen saw gains.

"The politics of this event have been dragging on for some time, but it appears to be heading toward a climax. We see further declines in USD/JPY based on a risk‑off repatriation of capital back to Japan, and because of the widening pressure on Japan’s current account surplus, at 4.0% of GDP," adds Grace

Aso's department apparently covered up the names of members of the government, deleting them from certain key documents involved in the deal, which were handed over during the investigations.

"Abe said in February 2017 that he would resign if any link emerged between himself or his wife and the scandal," says Valentin Marinov head of G10 FX strategy at Crédit Agricole.

If it emerges Abe or his wife were involved in smoothing the way for the land to be acquired it will probably mean the end of his reign and with it 'Abenomics' - his flagship economic stimulus programme. Part of Abenomics is a ¥10.3 trillion stimulus bill mandated by Abe to Haruhiko Kuroda, the head the Bank of Japan, in order to generate a 2% target inflation rate through quantitative easing.

Quantitative easing tends to undermine a currency as the large injection of capital lowers unit value of a currency under a basic supply and demand scenario. Cutting back on the stimulus could therefore help the Yen.

Chart Perspective

From a technical perspective the yen has the potential to rise a little higher against the Pound as it has still not reached our previous minimum target for the pair at 144.00. 

We estimated this target based on the likely follow-through of the pair if it broke below its major trendline, which according to technical lore is the same as the golden ratio (0.618) of the length of the move immediately prior to the break.

This is shown on the chart below which we used to estimate our forecast in late February. 

So far the exchnage rate has reached a low of 144.99 but not all the way down to 144.00. The current market rate is higher now at 148.07. 

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