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Abe's resignation: five expert takes on the Japanese yen

Japanese prime minister Shinzo Abe announced that he would resign last week, because of health concerns. Five experts share their projections for the yen.

Japanese prime minister Shinzo Abe said Friday that he would resign after eight years in office. 

The news weighed on investor sentiment, and the benchmark Nikkei 225 fell 1.4%. 

Japanese equity funds have also returned less on average than counterparts in Taiwan, Korea and Hong Kong in the year to 31 July, according to Citywire data. 

The top performing First State Japan Focus fund returned 26.7% over the period. It is managed by Citywire AA-rated Martin Lau and AAA-rated Sophia Li

Meanwhile, the JPY jumped from 106.50 to 105.40 against the USD after Abe’s announcement, Bank of Singapore observed.  

Chief economist Mansoor Mohi-uddin and four other experts chime in on what lies ahead. 

 

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Japanese prime minister Shinzo Abe said Friday that he would resign after eight years in office. 

The news weighed on investor sentiment, and the benchmark Nikkei 225 fell 1.4%. 

Japanese equity funds have also returned less on average than counterparts in Taiwan, Korea and Hong Kong in the year to 31 July, according to Citywire data. 

The top performing First State Japan Focus fund returned 26.7% over the period. It is managed by Citywire AA-rated Martin Lau and AAA-rated Sophia Li

Meanwhile, the JPY jumped from 106.50 to 105.40 against the USD after Abe’s announcement, Bank of Singapore observed.  

Chief economist Mansoor Mohi-uddin and four other experts chime in on what lies ahead. 

 

Mansoor Mohi-uddin, Bank of Singapore

Chief economist

Abe’s corporate governance reforms spurred the Nikkei to almost treble during his tenure. Thus, investors turned risk-seeking and shunned the JPY. The currency fell from 77 against the USD in 2012 to as low as 125 in 2015 – to the benefit of Japanese exporters.

The ruling Liberal Democratic Party will now hold an internal contest to find Abe’s successor. The continuity candidates – cabinet secretary Yoshihide Suga, finance minister Taro Aso and LDP policy chief Fumio Kishida – will keep Abe’s market-friendly policies.

The one candidate with a more populist agenda – former defence minister Shigeru Ishiba – appears to have few supporters amongst LDP members of parliament.

Thus, the risk from a shift in economic policy under a new prime minister seems low. A surge in the safe-haven JPY, however, owing to sudden political uncertainty may be the greater threat to Japan’s stock markets in the near term.

UBS Global Wealth Management

As the JPY has weakened significantly under Abe’s premiership during the Abenomics era, we believe there is a non-negligible risk that the currency could reverse part of its weakness.

Crucial to this, in our view, is who takes on the role of the Japanese prime minister after Abe, and the new head of government’s policy inclinations.

We believe a potential successor to Abe is Shigeru Ishiba (the former defense minister), who is known to have a hawkish monetary policy bias, and has been a critic of the Bank of Japan’s ultra-loose monetary policy.

Should he become the next prime minister, speculations about a more hawkish monetary policy regime could rise, which would be JPY supportive.

However, greater policy uncertainty is for us more of a longer-term JPY consideration. In the near term, regardless of who the incoming prime minister is, we think a radical change in the BoJ’s monetary policy is unlikely, particularly given the backdrop of a sluggish global and domestic economic growth outlook.

John Vail, Nikko Asset Management

Chief global strategist

Many media reports are suggesting that Yoshihide Suga is leading the race to be Japan’s next prime minister, with a main question being whether he, without a large faction of his own, will just be a temporary placeholder for new leader.

In this regard, it is important to note that he is not just a safe pair of hands; rather, he has the same long-held vision as Abe and led his rise into his second stint as prime minister in 2012.

If Taro Aso, Abe’s close friend and ally, remains as finance minister, such would be very helpful in preventing yen appreciation, as he has always been vocally adamant that it should not appreciate, and is closely aligned with Bank of Japan governor Kuroda on such. 

There is little reason to expect Suga-san would disagree. [He] perhaps might even push for more yen-weakening policies.

Dong Chen, Pictet Wealth Management 

Senior Asia economist

Abenomics has relied to a large extent on very accommodative monetary policies. Although we do not expect much change in fiscal and monetary policy following Abe’s resignation, the tight coordination between the two may become looser under a new government. That could relieve some of the downward pressure on the yen.

However, we do not see Abe’s resignation as a game changer for the yen. Monetary policy is already at the limit of what it can do and monetary easing globally since the Covid-19 crisis no longer seems particularly aggressive.

Our positive stance on the yen mostly rests on attractive long-term real rates, as inflation is structurally low in Japan. Coupled with a likely slowdown in the global recovery, we expect the foreign portfolio investment by Japanese investors that has recently weighed on the yen to decline.

Paul Brain, Newton Investment Management

Head of fixed income

It is important that some stability is maintained in the Bank of Japan going forward.

The Bank of Japan’s policies and Japanese government bond purchases have been one of the cornerstones of Japan’s policies for the past five or six years.

For any incoming prime minister the question will be if there is more that can be done in terms of government stimulus. Fiscal policies and tax policies will be highly anticipated in markets.

There is potential for the Japanese yen to be undermined by the political uncertainty. With the US dollar remaining weak from continued loose monetary policy, the yen may not fall too much against it. But other currencies such as the Euro and commodity based currencies can do better.  

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