How to Trade Japan's Election Surprise

Weakness Ahead for the Yen?
Brian Hagiawara | Brand X Pictures | Getty Images

If you thought the yen was a solid safe-haven bet during a time of worry about Europe and the "fiscal cliff," think again.

Overnight, Japan's prime minister said he was open to early elections - and the likely winner would probably be aggressive with economic stimulus moves. Not surprisingly, the yen tumbled on the news, and the question now is where it is headed next.

"I think there is definitely some good downside opportunity in the yen," says Kathy Lien, a managing director at BK Asset Management. "This political uncertainty combined with the economic turmoil that we are having in Japan really means that the Bank of Japan not only could ease monetary policy, but could move to this inflation target" of 3%. Getting there presumably would mean money printing and other efforts to get the economy going again.

That said, "it's not a very clear one-way trade," Lien warns, noting that the U.S. 'fiscal cliff' is adding to uncertainty and could fuel safe-haven demand for the yen. (Read more: What Is the Fiscal Cliff? CNBC Explains)

So Lien wants to buy the dollar against the yen at 79.80 with a stop at 79.20 and a target of 80.75. It is, she says "a very short, tight trade" to get in and out of before worries about the fiscal cliff make the yen appealing again.

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