Last week, Japan’s Prime Minister, Shinzo Abe, called a snap election. What does it imply for the gold market?
The German parliamentary election and crisis over Catalonia have recently brought the investors’ attention to the Europe. However, interesting developments have also been unfolding in Japan. On September 25, 2017 Shinzo Abe, Japan’s Prime Minister, called a snap election to take advantage of a weak opposition and to strengthen his mandate to handle the demographic crisis and tensions over the Korean Peninsula. The vote for the powerful lower house of parliament will be held on October 22, more than a year earlier than expected.
The Abe’s party leads in the polls, as 44 percent of voters would back the ruling Liberal Democratic Party, but recent months showed that everything can happen in politics right now (remember May’s gambit in the UK or Macron’s emergence in France?). Indeed, Yuriko Koike, the governor of Tokyo, has already announced the formation of a new party (Party of Hope), attracting politicians from other opposition parties (actually, the decision of a snap election came hours after Koike’s move).
What does it all mean for the gold market? Well, Abe promised a harder line toward North Korea. Actually, if he wins, we could see increased militarization and the withdrawal of Japan from its post-World War II commitment to pacifism. These changes are rather ambiguous for the gold market. However, Abe also said that he would raise taxes but spend more revenue on child care and education instead of paying back public debt. And he asked his cabinet to compile a 2 trillion yen (about $18 billion) economic package by the end of 2017. Therefore, his reelection would mean more Abenomics, which should weaken the Japanese currency. It would be positive for the U.S. dollar, but bearish for the price of gold. Printing money should theoretically be bullish for gold, but investors should always remember that gold is mainly a bet against the U.S. dollar. This is why the exchange rate channel often dominates the safe-haven demand (however, this is not always the case: remember the introduction of NIRP in Japan?) – and why gold prices are negatively correlated to the greenback’s strength.
To sum up, Japan’s Prime Minister announced a snap election last week to strengthen its political position. His reelection would strengthen Abenomics and delay the end of unconventional monetary policy by the Bank of Japan. As a reminder, Abenomics was negative for gold prices. So if Abe wins, it will be bad news for the yellow metal (and vice versa). But until election, we could see a lot uncertainty and, thus, fluctuations in the gold market. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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