• Joel

Huge JPY surge as Japan PM Abe announces resignation

Markets were shocked this morning by the news that the longest ever serving Japanese PM, Abe, will be stepping down due to a worsening health condition. He will remain in charge until a successor is chosen, which could happen in the coming week.

The Japanese stock market, the Nikkei 225 sunk on the news of Abe’s resignation, and JPY has absolutely surged today; USDJPY is down around 1% on the day at 105.50 from earlier highs around 107.00.

The adverse market move reflects the emergence of increased political and economic uncertainty that Abe’s departure represents;

Over the past near decade, Abenomics has been the dominant economic policy in Japan; it has pretty much amounted to coordinated expansive fiscal and monetary policy, which has chiefly been aimed at lifting Japan out of deflation.

While the policy’s success is debatable (though no longer in deflation, the BoJ has been unable to reach its 2% inflation target over the past decade and Japanese economic growth has been sluggish), at least investors are used to it.

Any changes to Japanese fiscal policy or BoJ monetary policy along the lines of some new orthodoxy being pursued by Abe’s successor represents huge uncertainty.

Many of the favourites to succeed Abe would likely mean a continuation of Abenomics.

However, amongst the names being thrown around, two have been strong critics of Abe. Indeed, one of these names, Shigeru Ishiba has openly criticised the Bank of Japan’s ultra-low interest rates for hurting regional banks and called for higher public works spending to remedy growing inequality.

Abenomics has been “one of the key ingredients behind the JPY weakness in prior years” notes ING, another reason behind today’s upside in JPY. “Concerns about the post-Abe shift in the policy stance add to our bearish USD/JPY outlook (we target USD/JPY 102 by year-end), though we continue to see USD weakness as the main driver of the cross” conclude the bank. 


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