What Japan’s General Elections Could Mean for the Yen

A couple of days ago, Japanese Prime Minister Yoshihiko Noda threw in the towel and called for snap general elections. As it turns out, he was feeling the pressure to let go of power as his political party, the Democratic Party of Japan (DPJ), has been losing popularity lately.

When Noda first stepped into office in September 2011, his public support rate stood above 60%. As the years dragged on and as Japan suffered one economic blow after another, his popularity rating gradually dropped until it hovered close to 20% this week. Because of that, he decided to dissolve Japan’s lower house of parliament on Friday and called for a snap election on December 16.

During Noda’s term, the Japanese economy was still reeling from the effects of the earthquake and tsunami earlier during the year. It didn’t help that Japan sunk deeper into deflation, had a territorial row with China, and is now facing the possibility of falling back into recession.

Japan general elections

Because of this, election analysts predict that Noda and the DPJ will probably lose the polls and that the current leader of the Liberal Democratic Party and former Prime Minister, Shinzo Abe, could end up as the next leader of Japan.

Now, Mr. Abe is a man who takes economic goals very seriously. Just recently, he announced that he wanted to implement drastic changes in the BOJ. One of these is to raise their annual inflation target from 1% to 3% in order to make sure that Japan would eventually climb out of its deflationary rut.

Bear in mind that the BOJ has already been pretty aggressive when it comes to boosting liquidity in their economy yet they’re still having trouble achieving their 1% inflation target. Aiming for 3% annual inflation would require the central bank to print even more money and keep interest rates below zero for a longer period of time. It’d be much easier for Dr. Pipslow to grow his afro back, I tell ya!

In line with Abe’s goal of battling deflation is his call to weaken the Japanese yen as it has been dampening demand for Japan’s exports in the international market. Loosening monetary policy further could hit both birds with one stone, and he mentioned that he wouldn’t hesitate to strong-arm the BOJ into doing so.

Apparently, he also has plans to reduce the BOJ’s independence from the government. Since Governor Masaaki Shirakawa‘s term is about to end, Abe wants to appoint a new central bank leader who would favor more aggressive monetary policy easing.

Of course nothing is set in stone yet as the general elections are still a month away. This means that Noda could still have a chance to avoid a no confidence vote on his party by stepping up his game when it comes to spurring growth. Luckily for him, the BOJ is set to make another monetary policy decision this coming week and this could be his opportunity to show the public that he’s also dead serious about their economy.

This is why analysts are predicting another round of easing for this Tuesday’s BOJ policy decision, even though the BOJ just unveiled a program of low-interest rates during their previous rate statement. After all, the recently released Q3 GDP figure revealed that the Japanese economy shrank by 0.9% and that this contraction might not be the last one for the year.

Whether Noda urges the BOJ to ease again or not, things still aren’t looking too sunny for the Japanese yen. If Shinzo Abe does step into office as public opinion suggests, he would definitely push for looser monetary policy and do whatever he can to cap the yen’s rally. Do you think he’ll win the elections next month? Let us know by voting through the poll below!