In Japan, Prime Minister Shinzo Abe has called for an election earlier than planned – for Oct. 22. Why? Well, PM Abe’s Liberal Democratic Party (LDP), in coalition with the Komeito party, holds a 2/3 majority in the lower house.  While that’s still a pretty strong majority, PM Abe clearly has in mind his main opponent, the Tokyo Governor, Yuriko Koike.

Ever since Abenomics started in the end of 2012, the first two arrows of unconventional quantitative easing and expansion of public investments have already taken place. But the last and most important arrow of structural reforms have not come into fruition. This is because these are unpopular policies, such as curbing the massive pension payout, no longer protecting certain sheltered industries, making it easier to lay off employees, etc. Noting the rocky road ahead, PM Abe called for the election now, 14 months sooner than necessary, also eyeing that his approval ratings have recently climbed higher closer to 50% from 30% in July.

The focus of this election is whether Tokyo Governor Koike’s popularity could steal away seats from the LDP. Once a news caster and fluent in Arabic, Koike quickly rose to high ranks in the political world, including becoming Defense Minister for the LDP at one point, though that only lasted for 50 days. She defected from the LDP when the Party did not endorse her for the position of the Governor of Tokyo, but nonetheless, her charm and popularity survived as she won the race and formed her new party. Part of the reason why Abe suddenly called for this election is so that Koike would not have enough time to prepare for a PM’s job.

What’s most intriguing, though, is that these two candidates’ policies are strikingly similar, even on the controversial national defense front amid the ongoing saber-rattling from North Korea. From all of this, it doesn’t seem like Koike is ready to take on this battle now…

So what will happen to the Japanese Yen (JPY)?

My View: Because of policy similarities between the two candidates, the JPY doesn’t seem worried about the election result and continues to be soft. (This is a bit counter-intuitive, but when the Japanese economy is doing okay, the JPY tends to weaken, which is what is happening now. In a super-low interest rate environment, Japanese corporations are willing to take more risk, borrowing JPY and investing abroad, which results in their currency weakness.) Whatever the outcome, however, it will be essential for the politicians to remain on the consistent path for further growth.

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