There are rumors that Japanese Prime Minister Abe will call an election on Tuesday (Monday night for US traders)

Shinzo Abe

Abe could be poised to call an election

What will an election mean for yen trades?

An election call has been rumored for two weeks and the main think is that it’s bad for the yen because Abe will win and it will solidify easy money and Abenomics.

That said, an election is always a risk so USD/JPY longs might decide to pare back positions and sit on the sidelines until the outcome is more certain.

That trade, I think, is about 80% priced in. Beyond the initial kneejerk, there shouldn’t be a huge reaction.

What has changed?

Abe is ahead in the polls, but the polls were taken before today’s GDP data showed Japan falling back into recession. The ‘R-word’ is tough campaign fodder for even the best politicians.

What will happen?

Abe will campaign on delaying, or even canceling the sales tax hike. Japan already has a completely unmanageable debt load but it’s easily financed because of low rates and the extreme proclivity to save in Japan. One day the market will get sick of Japanese debt and it could trigger a global crisis but that could be a decade from now.

What to do?

There are so many variables that it argues for heading to the sidelines until the picture clears. There’s no obvious trade on an election call.