USD/JPY soared in Asian and early European session coming within a pip of the key 80.00 level while taking all the yen crosses markedly higher after Prime Minister Noda announced that he would dissolve the lower house of the Diet and call snap elections in early December, The opposition leader Shinzo Abe agreed to the idea in exchange for an plan to reform and cut parliamentary seats.
Mr. Abe stated that should LDP recapture power it would make an utmost effort to defeat deflation by expanding fiscal spending while advocating a much more aggressive monetary policy. Among the measures that Mr. Abe proposed were revising the BOJ law so that the government may have stronger influence over the selection of a new Governor and direction of monetary policy.
It is clear that Japanese fiscal officials are frustrated with BOJâ€™s timid attempts at QE which have failed so far to halt yenâ€™s strength hurting the countryâ€™s vital export sector. Mr. Abe appeared to be advocating an open-ended monetary easing policy with few limits in sight that would serve as counterweight to Fedâ€™s massive QE programs.
The possibility of much larger QE buying program from the BOJ helped fuel a rally in USD/JPY that took the pair within a whisker of the 80.00 level. For now reports of Asian Central bank selling, most likely in attempt to defend option barriers has capped the rally. However, if risk flows accelerate into North American trade and if US Retail Sales manage to beat the modest forecast, USD/JPY is likely to barrel through the 80.00 figure as market sentiment has changed dramatically given the prospect of political change in Japan.