JPY Tumbles as Newly Elected Prime Minister Jumps into Action

Newly elected Prime Minister Shinzo Abe, will not be installed officially until December 26^th, but he is wasting no time pushing forward his economic policies and promises made during this campaign.

After winning a landslide victory giving him over 2/3rds control of the lower house of Parliament, Abe has enough votes to overrule the upper house, giving him the ability to push his platform through without resistance.

Abe and New Komeito leader Natsuo Yamaguchi agreed yesterday to compile a large-scale supplementary budget for fiscal 2012 as they kicked off talks to form a coalition government. He also met with Bank of Japan Gov. Shirakawa earlier in the day and urged the central bank to set an annual inflation target of 2% for the consumer price index. During a conversation a day ahead of a two-day BOJ Policy Board meeting, Abe also told Shirakawa that his incoming government wants to reach a policy accord with the BOJ under which the bank will set the inflation target and keep pursuing monetary easing until achieving it. Although, many central banks follow this type of guidance and policy, similar to those being adopted by the US Fed, they remain independent and set the inflation targets, in the case of the Bank of Japan, the political body wants to push through their inflation goal, which is double the rate set by the bank.

The newly elected Prime Minister’s remarks could affect decisions during the Policy Board meeting about the future course of monetary policy. Some market participants said their attention was turning to Shirakawa’s next news conference, scheduled for Thursday. This should be a major event, as the BoJ is expected to add huge stimulus policies.

“I told him that during my election campaign, I called for setting a policy accord with the BOJ and a 2 percent inflation target,” Abe told reporters. “The governor just listened,” he said when asked how Shirakawa responded.

Yesterday’s data gave markets a good view at how bad the economy was hurting. The report printed showing the second largest trade deficit in Japan for last 13 years, although exports were not as bad as expected. The USD/JPY trades at 84.32 breaking its high for 2012. The Nikkei index keeps marching higher breaking above the 10k points mark for first time since early April, up +1.27% in the first minutes of trading helped on weaker yen, as the currency is weakest of all majors. 

Market focus has now shifted to the looming fiscal cliff crisis. The Republicans have softened their position, and it appears that any agreement will include tax hikes on the nation’s wealthiest earners. Privately, President Obama and House Leader Boehner seem to be making headway. Negotiations between the Democrats and the Republicans are in full gear, and lawmakers on Capitol Hill would love to hammer out a deal before the Christmas holidays next week.

Thursday will be an exciting day for the USD/JPY with the Bank of Japan decision and press statement and markets are expecting some sort of announcement from US lawmakers before the holiday break, with perhaps a vote scheduled for Friday. This will be the conclusion of an interesting week.