Shinzo Abe and his Liberal Democrat Party (LDP) took major losses in the Tokyo Municipal Assembly elections held Sunday. Tokyo Governor Yuriko Koike’s Tomin First No Kai party toppled Abe’s Liberal Democratic Party to capture by far the largest representation of any party in the 127 seat Tokyo Municipal Assembly. This was a historic defeat for the LDP, yet it was widely anticipated as Abe has been rocked by a series of favoritism scandals and gaffes involving folks close to him and his administration.
While limited to Tokyo and its 14 million residents, the Tokyo Municipal Assembly election has long been a bell-weather for national politics in Japan and an indicator for things to come.
With these elections limited to the political makeup of Tokyo and with Mr. Abe still in power and seen as relatively safe in the near term, much of the impact will be decided by his reaction to this historic rebuke.
The prevailing opinion in markets is that Mr. Abe may feel forced to double down on his current policies, known as “Abe-nomics” and characterized by profound easing and weakening of the Yen, and feel an even greater sense of urgency to advance his agenda.
More broadly speaking, uncertainty and ambiguity is usually a negative headwind on a currency. Even though this result has probably been priced in to markets, any protracted discussion of how this result may shift the balance of power in Japan could also dampen Yen valuations and put further downside pressure on the Yen.
With respect to this week, it is challenging to see any news angle from this election event as constructive to higher prices. Only a restructure of Japanese politics around a more populist platform over a longer time horizon would be seen as enough to strengthen the Yen on the political fundamentals alone.
For forex spread and binary options traders making trading decisions today and for this week, this bit of fundamental news and volatility could provide several set ups across multiple Yen backed currency pairs. The Yen had seen weakness recently as the Bank of Japan (BOJ) has reinforced a dovish outlook. If markets price in an anticipated acceleration of “Abe-nomics” in response to the elections, additional volatility supportive of further downside erosion in Yen valuations could result.
The Euro / Yen pair has seen bullishness since mid-April when we crossed through “the clouds” on a daily Ichimoku chart. We could see an extension on this run based on relative Euro strength conflating with the political events emanating from Japan. The Ichimoku indicators set up for a protraction as we have crossed over all moving averages in addition to the cloud and the pair has built meaningful near-term momentum.