There is plenty of anticipated volatility in the Japanese yen market today as traders digest news of the resignation of Japanese prime minister Shinzo Abe. The market in yen is understandable unnerved, given his role as Japan’s longest-serving post-WW2 leader. He brought much-needed stability to Japanese politics during his second term as PM, but was also valued as a politician with distinct economic vision.
Abe’s resignation had been anticipated following recent hospital visits, and ahead of today’s press conference, analysts in Tokyo had been speculating that the prime minister was going to step down with a year left in his term.
The yen took a dive almost immediately, and sterling hit a six month high against the JPY. USD/JPY went to a 10 day high.
Izumi Devalier, Japan economist at the Bank of America Merrill Lynch said:
“The market could exhibit knee-jerk equity weakness on the rising chance of an internal regime change as it is difficult to believe at this point the next PM will be able to maintain the same degree of political stability as PM Abe has. It is uncertain whether JPY will rise of sell off given this is about domestic risk, but the combination of increased political risk in Japan and the US could be initially negative for USD/JPY.”
Analysts are expecting short term volatility in both the Nikkei and the JPY, but we are about to head into the weekend, so further volatility will likely be postponed to Monday. We are swiftly going to see focus shifting onto who Abe’s likely successor will be, as the market will need to be convinced that the Japanese economy is in safe hands. The ruling Liberal Democratic Party is not short of potential candidates, including Shigeru Ishiba and Yoshihide Suga (currently the chief cabinet secretary).
Yen sell off likely to be short term, but watch the politics
Any risk off reaction from the market is likely to be short term in scope, while longer term the focus will be on who takes over, and whether they will be a sustaining force for Abe’s economic policies. Two of the key issues are going to be what sort of policy framework we are looking at under the Abe successor, and whether whoever takes over will be able to maintain the political stability Japan needs during the pandemic crisis.
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Sterling managed to break out against the JPY decisively, shrugging off the resistance level maintained since June. Yesterday’s decisive bull candle cleared the resistance with a near six month high. There has been a strong uptrend in the GBP/JPY pair in the last few weeks. This is further supported by a rising 21 day moving average. Near term weakness in the JPY is making it look like a chance to buy.
In late trading Friday going into the end of the UK session, the JPY was trading at 140.2, largely maintaining the trend traders have seen since the end of June. However with Brexit still the runaway train coming down the tracks for sterling in the autumn, this pair could end up producing a lot more volatility in the next few weeks, and that’s before the LDP starts discussion the Abe succession.