Partner Center Find a Broker

Firstly, China’s Shanghai Composite index slid by 6.7%, causing investors to scamper back to the USD and JPY. The index has already declined by 23% to 2667.75 since August 4 and technical analysts are dubbing it now as a bear market. The drop in the index yesterday was triggered by the announcement of a huge 16.85 billion Yuan IPO offering of Metallurgical Corporation of China. With the the huge line up of IPOs and concerns of weak bank lending, there has been speculation that this could lead to an illiquid market. Moreover, some fear that the recent rise in equities is outpacing the prospects for the economic growth added more fuel to yesterday’s fire.

The US capitals markets also fell, given the economic link between the US and Japanese economy. Commodities like oil and gold were not able to escape yesterday’s bloodbath as well. Oil fell 3.9% to $69.92 per barrel while gold dropped 0.5% to $953.50 per ounce.

Secondly, there was the landslide victory of the Democratic Party of Japan in the latest Japanese elections. The DPJ managed to score a whopping 308 out of 480 seats in Parliament! The ruling party – the Liberal Democratic Party – has been criticized for being too outwardly dependent. With the promise of internal change, the DPJ victory sparked a glint of hope for the future of the Japanese economic and political landscape, thus boosting the JPY.

Now comes the hard part. Upon inheriting the responsibility to save Japan from rising unemployment, falling salaries, deflation, and homelessness, the DPJ pledged to support households plagued by decades of economic stagnation. Part of its laundry list of policies is its plan to ease fiscal policy further in 2010 by boosting household disposable incomes by about 7 trillion JPY annually. The DPJ also promised not to increase consumption tax for at least four years.

Another major problem that the DPJ plans to address is Japan’s aging population. Japan has the world’s highest proportion of people over 65 years old and the lowest ratio of those under 15. They plan to pump up their spending on childcare programs in order to boost the desire to raise children.

Headed by the new Prime Minister Yukio Hatoyama, the DPJ aims to strengthen its ties in Asia as well as with the US. Hatoyama stressed that Japan is ready to pursue a more independent foreign and security policy, particularly putting more emphasis on its relations within the Asian region. In fact, there is some talk of creating an independent Asian monetary fund now that some DPJ members have shown support for China’s proposal to establish a new global reserve currency.

With the new political heavyweights lobbying for a chock full of political and administrative reforms, there is the possibility that Japan’s public debt could loom to about 200% of GDP next year. To finance an economic aid package that could total 16.8 trillion Yen in 2013, the DPJ says it will eliminate 9.1 trillion Yen in unnecessary spending, tap special accounts managed by the nation’s bureaucrats, and abolish some tax deductions.

What could this mean for the JPY? For one, there’s the possibility of currency weakness because some believe these Democrats could incite another round of government spending to spur economic activity and jumpstart recovery. Like I mentioned, some of these include boosting disposable income of consumers by launching child allowances, free-high school admission, and road tax cuts. This, of course, means increased government spending and therefore, debt. Fears of the JPY devaluing seem to be completely understandable considering Japan’s government is already knee-deep in debt.

On the flip side, the victory of the DPJ could also been seen as JPY positive. The reason behind this is that the ruling Liberal Democratic Party was extremely sensitive to the domestic currency’s strength. Now, with the DPJ in power, this will no longer be an issue. Rather than relying on external forces (such as demand for the country’s export) to determine the direction of Japan’s economy, the DPJ favors revitalizing the economy from within through major policy changes.

Then again, more fears coming out of the other major economies like US and China could still lead to a run to the safe haven currencies and this spells a bullish outlook for the JPY and USD. Yet, didn’t we just see the Yen rally on an improvement on its poltical and economic landscape? Could the Yen possibly benefit from both global risk aversion and local optimism? Maybe. Like I always say… ‘These are unprecedented times – we just don’t know what’s going to happen”.

Forex News
Forex Reviews
Forex Trading Journal
Forex Q&A