Will the yen benefit from the global credit crunch?
“Weak governments usually go hand in hand with weak currencies,” says Edward Hadas on Breakingviews, “But the electoral enfeeblement of Shinzo Abe’s administration in Japan may strengthen the yen.” Abe’s Liberal Democratic Party suffered an embarrassing defeat in the Upper House elections this week, retaining just 37 of the 121 seats being contested – 20 short of a majority. Support for the government has plummeted after a slew of corruption scandals and the revelation that it had lost 50 million pension records.
But the public’s gripe lies with Abe’s cabinet, rather than his legislation, and he should remain in power, says Julian Jessop of Capital Economics. However, Hidenao Nakagawa, “leader of both party and anti-[interest-rate] hike rhetoric”, was not so lucky, says Hadas. His resignation will bolster those looking for higher rates – and perhaps spook foreign investors who have taken a position in the yen carry trade, which has flooded global markets with cheap liquidity. Data released this week showed that Japanese industrial production rose 1.2% in June, the first gain in four months, and unemployment has fallen to a cyclical low of 3.7%, reinforcing expectations that the Bank of Japan could raise rates to 0.75% next month.
“But views on risk aversion at this sensitive time seem likely to be more important for the foreign-exchange market than the evanescent world of Japanese politics,” Deutsche Bank’s Marshall Gittler tells Reuters. Market jitters have sparked a wave of risk reduction in currency carry trades, causing the Australian and Kiwi dollars to slump to two-month lows against the yen. The dollar is also at risk of a major fall against the yen “as speculators who are riveted on the slumping US housing sector appear keen to sell the dollar”, Mitsubishi’s Hideaki Inoue tells Forbes. As the prospect of a severe credit crunch dawns on global markets, the yen looks like it will go from strength to strength. As Hadas concludes, “the yen could be a rock in troubled markets”.
