Yen Weaker After Abe Decides To Hold Snap Elections

Despite Japan being closed for holiday, the Yen has started off on the back foot, with the USDJPY rising 20 pips following a weekend Nikkei report that Prime Minister Shinzo Abe has decided to dissolve the lower house with a general election to follow next month, hoping to capitalize on an uptick in public support before the opposition has a chance to regroup and mount a formidable challenge.

According to the Nikkei, the plan is rooted in the assumption that an early dissolution would work to the advantage of Abe"s Liberal Democratic Party and junior coalition partner Komeito. The Democratic Party, the main opposition group, is mired in turmoil, with multiple members reportedly looking to defect. Abe"s other goal would be to head off the advance of Tomin First no Kai (Tokyoites First) onto the national political scene. The face of the group is Tokyo"s popular governor, Yuriko Koike.

Abe is expected to make the final call after assessing the North Korea situation. The logic is that the rogue state"s recent missile launches and nuclear test might actually work in the LDP"s favor - the conventional wisdom being that the public will prefer an experienced, relatively hawkish leader like Abe.

The prime minister met with LDP Secretary-General Toshihiro Nikai at the prime minister"s office on Friday, upon returning from a visit to India. 

Abe"s decision is likely reinforced by his recent sharp rebound in the polls: having seen his approval rating plunge to record lows as recently as two months ago following a series of cabinet corruption scandals, on Friday, a poll conducted by Japan"s Jiji founds that the approval rating for Abe’s Cabinet rose 5.2% points to 41.8%, exceeeding disapproval for first time in 3 months. The poll cited the government responses to the North Korean missile launches and nuclear test as a reason behind rise in approval, although it is not exactly clear just what those "responses" have been, besides empty jawboning and threats. According to the 2,000 individuals survedy, Abe"s  disapproval fell 7.4 ppts to 36.7% 

Sensing a change in the political winds, senior Komeito officials gathered for an emergency meeting on Saturday. The party shares the view that a dissolution is possible before the end of the year, and intends to begin preparing for an election. Also on Saturday, Komeito officials discussed the matter with senior officials of Soka Gakkai, a lay Buddhist organization that serves as the party"s base. Soka Gakkai is to hold a campaign strategy meeting on Sunday.

For now, the market response has been muted, with the USDJPY spiking above 111 at the open, although that may be more a function of the S&P finally hitting a new record high just north of 2,500.