Choppy trade on Monday after the LDP got control of the upper Japanese house in elections on Sunday was explained as buy on the rumor, sell on the fact or disappointment that Abe did not get outright control. Abe's LDP party won 65 seats and the junior coalition partner New Komeito took 11 seats. That gave LDP control of both parliamentary houses for the first time since 2007.
So why did the yen rally when everyone expected it to fall on an Abe victory?
The LDP needed 72 seats to win outright control. Some may have been disappointed. Some 75 percent of voters did not vote or backed the opposition. Turnout was only 52 percent, some five percentage points below previous elections for upper house seats. And the LDP and New Komeito combined got less than 50 percent of the total vote, hardly an overwhelming endorsement. Given the small turnout, half of those registered to vote, and only half voting for the coalition, only one in four voters actually gave the coalition their support at the booth.
However, the coalition did win. The LDP and New Komeito won 76 of the 121 seats in the election of the 242-member upper house. With an existing 59 seats not contested, the coalition has a majority and it leaves the possibility that Abe will not have to face the polls again 2016.
Which still leaves the yen action to explain.
It is most likely that because the overall result was in line with market expectations, there were some investors who jettisoned dollar positions on the news believing the scenario was already priced in. That caused flows to the yen after a prior build up in short positions. That dollar selling then fed on itself as more investors were forced to sell to prevent losses. But looking out even just a few days, expect the yen to continue to weaken. It has not traded outside a 5 yen range against the dollar in months despite all the uncertainty and while that forms a very big consolidative base, the fundamentals are such that Abe does have enough votes to implement his version of growth and on the other side of the Pacific the Fed is taking back stimulus. It’s dollar strength, yen weakness for the foreseeable future.