Japanese Prime Minister Shinzo Abe has introduced policies to remove Japan from a deflationary spiral and place it back on the road of economic growth – better known as “Abenomics”.
Abenomics has had the affect of weakening the Japanese Yen against not versus the U.S. Dollar, but also against the Euro, Pound, Australian Dollar, etc. The USDJPY for instance was near the 75 mark just a couple of years ago but today it reached the psychological round level of 120 – an impressive 50%+ gain.
Whether the Abenomic policies have reached their desired result for the Japanese economy remains a question mark:
- Japanese wages after inflation adjustments dropped for 16 months straight;
- Households have cut spending for 7 months straight.
It was probably the lack of growth in these figures that made the prime minister cancel his plan of implementing a tax hike.
Japan will have an election on Sunday, December 14, 2014, which was voluntarily introduced by the prime minister himself. The scheduled elections would normally have been held late 2016.
The main question is: why would Abe expose his party to the risk of losing the majority and political power, especially considering the weak growth figures mentioned above?
Abe has been quoted saying: “The election will be held to ask the public whether we will move forward with Abenomics or end it.” In other words, the prime minister is seeking approval for his policies now – not in the future.
This political event could have a major impact on the Yen currencies and it is definitely an event to keep an eye on for us Forex traders. Let us take a look at the 2 scenarios:
- Abe wins elections: the electorate gives their approval for continuation of Abenomics. Translation in Forex: the Yen could continue to weaken, which means USDJPY, EURJPY, and GBPJPY can expect further upside trend continuation (blue arrows).
- Abe loses elections: the electorate disapproves the Abenomic policies. Translation in Forex: the Yen could continue to consolidate or strengthen, which means USDJPY, EURJPY, and GBPJPY can expect reversals back down (red arrow) or consolidation (orange lines).
Currently Abe’s party the Liberal Democratic Party (LDP) is ahead in the polls. Also when looking at Japan’s historical voting record, many current governments get reelected.
When reviewing these two points, it does seem likely that Abe will remain prime minister after the elections: the continuation of Abenomics and further Yen weakness are probable outcomes.
Forex traders need to be cautious of holding Yen over the election weekend as volatility could seriously endanger one’s margin account. Also, depending on the outcome, Forex traders can attempt to ride the tide but always look for price action confirmation before making any trades.
What do you expect the USDJPY will do next year in 2015?
Do you see the Yen weakening further or reversing?
Let us know down below!
Thank you for sharing this post and wish you Happy Hunting!
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