TOKYO -- Investors are hedging against upheaval in the foreign exchange and stock markets as campaigning for the Japanese lower house election begins, reckoning that a strong showing by the opposition could send the twin trends of a depreciating yen and climbing stocks into reverse.
Trading in currency options to guard against yen appreciation has surged since Tokyo Gov. Yuriko Koike launched her Kibo no To, or Party of Hope, in late September. Open interest in these contracts reached a roughly four-and-a-half-month high early this month and continued to rise through Tuesday, the official start of the campaign season culminating with the Oct. 22 vote.
If the future of Prime Minister Shinzo Abe's government appears in doubt, "an assumption that the Bank of Japan will quickly bring monetary easing to an end could drive appreciation in the yen," said Hidenori Suezawa of SMBC Nikko Securities.
The impact could ripple through the market for Japanese government bonds as well. The BOJ's massive purchasing of JGBs has pushed up their prices, keeping yields low. If there are doubts about whether easing will continue, "yields on long-term JGBs seem like they will rise," according to Kazuhiko Sano of Tokai Tokyo Securities.
Stock market players also worry that Abenomics could take a hit if the ruling coalition of Abe's Liberal Democratic Party and partner Komeito suffers setbacks. Prices could subside overall if the BOJ cuts back purchases of exchange-traded funds.
But others believe that a lively policy debate with the Party of Hope and other opposition groups could provide just the push the ruling bloc needs to come out with new economic programs that would work in the equities market's favor. "A new timeline for Abenomics would give stock prices a boost," said Kosei Mikuni of Nissay Asset Management.