Sales Tax & Snap Elections… USDJPY Implications

If you have been following the Morning Report this week you will be aware of the significant influence that the rumours regarding the potential postponement of the Japanese Sales Tax and possible snap elections have had on the JPY complex. Ahead of Abe’s return form overseas this weekend lets take a quick look at where things stand and what may lie ahead for the USDJPY.

We have seen further swings in USDJPY around the issue of a delay to the sales tax and a snap election but it is now clear with USDJPY up from an Asian trading session low of 115.73 that a delay to the tax hike and a snap election are both more clearly welcomed by the market.

Dithering at this stage can’t be very helpful for the Abe government. Given the increased volatility that the speculation it is causing, the market is pressing for the government speeding up the decision and making an announcement. The Mainchi newspaper has reported that PM Abe will hold a press conference next week to announce the delay and to explain his reasoning. The market is pushing for a sooner rather than later approach.

The market clearly likes the idea of a delay to the sales tax increase, and a snap election may also reinforce optimism of a stronger effort being made in regard to the 3rd arrow of Abenomics.

It appears the only issue now to be determined, which will be important for perceptions on how serious the government views the fiscal situation, is how long the tax hike will be
delayed for. Many appear to be expecting a delay until April 2017 that’s a year and a half beyond the original date and anything longer than that or an announcement to defer the decision would be a bad signal for the market.


Implications for the USDJPY… 

Whatever the outcome on the timing of the delay, the delay itself and the snap election seem well priced at current levels we would look to use any pullback ahead of the announcement to 114/13 area as an opportunity to position for further upside.

Although the recent USDJPY rise was fast, supported by the BoJ’s QQE II on 31st October, the lack of market positioning ahead of the announcement and this weeks squeeze to seven year highs suggest there is still scope for the USDJPY to test closer to the 120 level based on current trajectory and market sentiment.

If the announcement to defer the tax is delayed or avoided then we would anticipate a swift corrective move to ensue and a stern test of 110/11 key support level as an opportunity to reposition long at discounted levels. A breach of this support would have more significant implications and require a re-assessment.