What the Upper House Elections Mean for the Yen

On Sunday, July 21, 2013, Japan will be holding its Upper House Elections, with the government hoping it can finally establish a majority party and end the “twisted parliament”.

A twisted parliament is also known as a hung government, which is a scenario in which different parties have control over the Lower and Upper Houses of the Parliament. In this case, Prime Minister Shinzo Abe‘s Liberal Democratic Party (LDP) currently controls the Lower House, while the party’s major rival, the Democratic Party of Japan (DPJ) has the most representatives in the Upper House.

Why is it so important to have control of both Houses, you ask?

The main reason why you would want to have a majority of seats in both Houses is because it would make it easier to gain support and implement your plans. Remember, laws and government plans are passed through the Houses. The more seats you have, the more voting power you control (assuming everyone votes in favor of the party’s proposal), and thus, a higher probability that your proposals will get passed.

Initially, it appeared that Abe and his coalition government – basically, an alliance between the LDP and some of the smaller parties – wanted to win a two-thirds majority in the Upper House in order to establish strong support for his regime. This would have required the coalition to win 103 of the 156 seats available.

However, it’s looking more and more like that they don’t care as much about having a two-thirds majority and will settle for slightly more than a simple majority. In fact, the coalition government hasn’t even fielded in enough applicants to fill up all the 103 seats needed for the strong majority.

As it is, survey results released earlier last week indicated that the LDP should win between around 65 to 70 seats, while its coalition partner, the New Komeito (NK) will probably win between 9 to 11 seats. Combined, this will give the LDP the majority it needs to control the Upper House.

Interestingly, after the release of the results, we saw the yen take a hit, as yen pairs climbed up the charts:

Yen Pairs

Remember, a victory for the LDP would mean that Abe would have more power to push for aggressive policies, some of which are geared towards weakening the yen in order to make exports more competitive. This means that a LDP victory will mostly likely be BEARISH for the yen.

That said, with surveys favoring Abe’s party, it shouldn’t be surprising that market players are already positioning themselves in anticipation of a weaker yen moving forward. When the results are released and it shows that the LDP is in control, we could see yen crosses continue to rally up the charts.