The Japanese election results came in, and the markets got their wish—Shinzo Abe and the Liberal Democratic Party (LDP) produced a landslide victory in the December 16 election.

Abe made the war on both deflation and the strengthening yen central objectives of his candidacy. Along these lines, he has called for very aggressive and potentially unlimited monetary easing policies by the Bank of Japan (BOJ) to weaken the yen. Most of all, he has stressed his intention to hold the BOJ accountable to these goals, threatening to remove the central bank’s independence if it fails to act.

The majority of Abe’s coalition government is now large enough to single-handedly implement his policies. The markets were predicting this outcome, and the yen had already started weakening compared to the U.S. dollar over the last month, when there were calls for a new election and Abe appeared to be the frontrunner. [Japan ETFs Look Cheap and ‘Yen Headwind’ May Recede on Election]

I believe this is critically important for the MSCI Japan Local Currency Index (Japan’s equities), which has experienced performance that has tended toward a sharply negative correlation with the currency’s seemingly unending strength.1 In other words, as the yen has tended to appreciate relative to the U.S. dollar, Japan’s equities have tended to decline.

What are potential targets for the yen?

I remember when WisdomTree launched its first Japan Fund on June 16, 2006, and the exchange rate was approximately 120 yen to one U.S. dollar.2 Today, December 17, 2012, it’s approximately 84 yen to the dollar.3 I think about Toyota selling a car for $20,000—and the 2.4 million yen they used to receive has been cut down to 1.68 million yen today.4 The revenue hit to Japan’s multinationals over these six years has just been incredibly hard for corporate Japan—specifically the companies that depend on exports for the bulk of their revenues.

No one knows what target level Abe has for the yen, but if he can produce a psychological shift in the prospects for the currency, I believe that there could be major moves over the next few years. As a baseline, from the December 17, 2012 level of approximately 84 yen to the U.S. dollar, a 50% depreciation of the yen relative to the dollar would bring the value of the yen close to the 120-yen-per-dollar level seen around June 16, 2006. I am not expecting that to happen in the immediate future, but it provides a sense of how significant the yen’s performance relative to the U.S. dollar has been over this period.

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