The yen extended losses and dipped into the lowest point in more than three months after Prime Minister Shinzo Abe’s ruling coalition maintained its majority of seats in parliament in Sunday’s general election, signalling continuity of his current policies on fiscal spending and monetary easing.
The yen lost its value by 0.82 percent to close at 113.458 per dollar on Friday. While the Abenomics policy of monetary easing, fiscal stimulus and structural reforms has dragged down the currency, the BOJ (Bank of Japan) has yet to reach its policy goal of lifting the annual inflation rate to 2 percent.
“The election outcome strengthens expectations for Bank of Japan Governor Haruhiko Kuroda’s reappointment or somebody with a similar stance being selected as next governor to extend the current unprecedented monetary easing, making USD/JPY more responsive to any rise in U.S. yields,” said Yuji Saito, executive director at Credit Agricole CIB’s FX department in Tokyo.
Even though Japan has seen six straight quarters of economic growth under Abe, spurred by ultra-easy monetary policy and fiscal stimulus, he still faces challenges from reining in Japan’s swollen public debt by pushing through a further sales-tax hike, a plan intended to conduct in 2019 said by the premier, in response to a rapidly-aging workforce and stagnant wages. Besides that, Abe has yet to find out a way to defeat deflation under current low level of inflation rate at 0.7 percent in August.
The economic outlook for Japan over the short and medium term is that extended easy monetary policy would continue to bolster optimism in investment from domestic and overseas market and also push down the currency, which helps to aid exports. Asset prices would accordingly be driven by larger investment and increasing net exports.
The U.S. Senate passed its fiscal year 2018 budget resolutions for reconciliation 51-49 on Thursday, opening the door for the passage of Republican leadership’s massive package to overhaul the tax code without support from Democrats.
It is a big step for Trump’s policy in preparing success of tax reform, and it provides fuels into equity growth and economic sustainability. Some economists, however, had different comments on the tax reform, saying that the timing of tax reduction may be risky as higher deficit would increase fiscal pressure from the government, which has adverse impacts on long-term economic prospect.
Technically the broader outlook for USD/JPY remains constructive, but it’s facing a significant resistance of the downward trend channel from earlier this year. In the event that it fails to break higher, traders should first watch for the pair to breakout beneath Oct. 16th’s low of 111.66. Alternatively if prices continue to climb higher, the pair will test the Mar. 10th’s high of 115.501. According to the CCI(14), it already surged far beyond 100, signalling a significant overbought at this moment.
Chart 1: USDJPY Daily
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