Yen Weak before PM Abe’s Decision on Sales Tax

The yen stayed weak against major currencies in Asia Tuesday as investors eagerly await a possible decision later in the day by Prime Minister Shinzo Abe to put off another increase in sales tax and hold a snap election.

On Monday, the Japanese currency got a brief rally following a surprise contraction in the country’s growth in the July-September quarter, which damaged investors risk-taking sentiment. But the move was short-lived.

The dollar USDJPY, +0.20% was at ¥116.53 from ¥116.56 late Monday in New York.

The euro EURJPY, +0.62% was at ¥145.35 against ¥145.12 after the European Central Bank President Mario Draghi on Monday expressed a willingness to take additional easing steps to prevent deflation.

“Overseas investors appear to be feeling the dollar’s resilience in light of its staying above 115 overseas despite surprisingly negative Japan’s figure,” said Yuji Saito, executive director of foreign exchange at Crédit Agricole Corporate & Investment Bank. “They are again leaning toward dollar longs,” he added.

Mr. Saito said while a combination of the tax delay and the general election has been priced in the market, attention has shifted to how large the government will compile an extra budget to bolster the economy.

“If the size were to be 5 trillion, that could prompt dollar buying,” he added. The additional stimulus worth ¥3 trillion has been factored into, he added.

Mr. Abe is likely to delay a scheduled sales-tax increase by more than a year from the original planned October 2015, dissolve the lower house on Wednesday, and hold a general election on Dec. 14.

The Bank of Japan’s two-day policy board meeting that ends Wednesday is also in focus. At the board’s Oct. 31 meeting, the central bank stepped up its already aggressive easing to prevent deflation from budding again.

But most market participants don’t expect a back-to-back easing by the BOJ.

Masafumi Yamamoto, market strategist at Praevidential Strategy in Tokyo said Monday’s unexpected fall in Japan’s third-quarter GDP figures would only help strengthen the likelihood of further easing by the BOJ.

“It was an unexpected downturn in the economy, but this can only strengthen the BOJ’s easing stance, not weaken it,” he said. “It appears that the dollar/yen’s upward trend will continue.”

In other currency trading, the euro EURUSD, +0.41% was at $1.2472 from $1.2451.

The WSJ Dollar Index BUXX, -0.24% a measure of the dollar against a basket of major currencies, was down 0.14% at 80.05.

Source: MarketWatch