The comments of Shinzo Abe, who is the current front runner to be Prime Minister of Japan after an election on December 16, has been the main cause of the nearly 4% rise in the USD/JPY over the last two weeks. However, his tone regarding monetary policy changed towards the end of last week, and I believe that he may face further pressure to soften his stance. For these reasons, I believe that we could see a slight correction in the USD/JPY, and I am looking for opportunities to sell this pair as a short-term trade sometime over the next week.
Shinzo Abe clearly softened his rhetoric last week. For example, two weeks ago Abe had said Japan's government and central bank should set an inflation target of between 2% and 3% and that the law governing the Bank of Japan should be changed, while over the past week he seemed to backtrack in saying, "If it [the Bank of Japan] agrees with our 2% target and commits to it, then there is no need to revise the BOJ law.”
As another example, Abe said two weeks ago that he wanted Japan to spend large amounts on public works projects, and “If possible, I’d like to see the Bank of Japan purchase all of the construction bonds that we need to issue,” seeming to imply that Japan's central bank should directly finance the government. However, over the past week he “clarified” in saying that the BOJ should not purchase these bonds directly from the government but should rather purchase them from the market.
There are three reasons I think Abe could face pressure to further soften his stance.
First, Abe's party has lost a little ground in Japan's upcoming election. Support for Abe's party, the Liberal Democratic Party, was at 23% according to a survey by Kyodo News done from Nov. 17 through 18. A survey done this weekend showed support fell to 18.7%. This survey also showed that those who prefer Abe to be Prime Minister declined from 35% the previous week to 33.9%.
Second, Abe has faced increased and unexpected criticism. For example, Abe's suggestion that Japan's central bank should possibly be less independent has been criticized not only by current central bank officials and political opponents, but also recently by a senior member of his own party.
Third, much of Abe's rhetoric was never credible to begin with. For example, bond market's in Japan are not even close to pricing in a 2% inflation rate, and a 3% inflation target seems completely unrealistic.
In conclusion, Shinzo Abe's tone regarding monetary policy has clearly changed. It also seems quite possible that he may face continued pressure to further soften his stance, and I see the possibility of a firmer stance on his part as being quite unlikely.
For these reasons, I'm looking to sell the USD/JPY this week as long as incoming information doesn't change my outlook. I still need a slightly better price (as of this writing the USD/JPY is at 82.54), US Dollar out-performance, better than expected economic data out of Japan, worse than expected US data, a general risk-off environment, further softening from Abe, or some combination of these scenarios before I will be comfortable making this trade.