Japanese parliamentary elections on December 16 - change of monetary vector

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Having not had time to move away from the presidential election in the U.S., the currency market participants have again plunged into the abyss of political factors that can dramatically change the balance of power among buyers and sellers of various currencies. This time the focus of attention was on Japanese yenthe safest of all the safe harbor assets.

The need for change in political Japan

The snap election scheduled for December 16 is the result of Prime Minister Yoshihiko Noda's dissolution of the previous parliament. The leader of the Democratic Party was forced to do so because repeated changes in the composition of the government did not lead to anything, and public support fell to 17% at a critical level of 20%.

It seems that the policy of the Democrats, who have to govern the country in the difficult conditions of the global recession, aggravated by the need to eliminate the consequences of the ecological disaster, has exhausted itself. The last straw in the sea of popular discontent was consumer tax increase to 10% in order to reduce the deficit and the rate of growth of public debt.

It is a good thing that most of the debt is domestic and financed by the population and domestic economic entities, otherwise the country of the Rising Sun would be destined to the fate of Greece or Spain on a much larger scale. Nevertheless, an increase in the index above the 90% mark according to OECD experts' estimates threatens to slow down economic growth in any country. In this regard, an increase in the consumption tax looks quite justified in economic, but not in social terms.

Japan's inflation as a trump card

The discontent of the electorate was taken full advantage of by the opposition Liberal Democratic Party, whose leader Shinzo Abe allowed himself some such radical statements that the devaluation of the yen was not long in coming. In the event of an election victory, the country, which has been unable to achieve 1% inflation in the last four years, plans to increase this figure immediately to 3%. This figure is higher than the one recorded in mid-2008 at the height of the global economic crisis.

To that end, the Leader of the Opposition proposes legislate the Bank of Japan's dependence on the governmentIn the case of the United States, increase the scale of quantitative easing and even introduce a major interest rate into the negative area, stimulating the activity of banking institutions.

The actions of the country's central bank, which increased debt purchases to 91 trillion yen in October this year and extended the program until December 2013, look ineffective, according to Abe. The country needs a larger monetary issue and devaluation of the national currency, which will force exporters to square their shoulders and promote economic growth.

The Liberal Democrats' program is growing in popularity, and there are few doubts that it is they who will come to power after the December elections.

Economics at the service of politics

The ruling party can hardly be saved by the delayed actions of the Bank of Japan related to the implementation of the program of providing banking institutions with unlimited cheap resources, the first package of which is estimated at 15 trillion yen.

Investors reacted to the political events in the country by outflow of funds from the money market, as well as increased interest in the objects of the stock market, which was reflected in the growth of stock indices. However, much more significant events may take place in the country's debt market.

The fulfillment of Liberal Democrat promises has the potential to drive investment out of the marketplace bonds and other borrowing, which will increase the cost of borrowing and create additional difficulties in reducing public debt.

Nevertheless, this factor is not particularly embarrassing to Abe, nor is the opinion of foreign investors who have long considered the yen a "safe haven."

What will win: internal changes or external background, we will know in the near future. Now we should once again recognize that political factors have a serious impact on the dynamics of exchange rates. At that, the mechanism of their influence is manifested in the framework of the same scheme: the opposition expresses dissatisfaction with the economic policy conducted in the country, and the central bank of the country tries to support the party in power by all available methods. In the United States, this was successful, but it is unlikely to work in Japan.