File image of Japan PM Sanae Takaichi. Picture by Simon Dawson / No 10 Downing Street.
The stonking victory of Sanae Takaichi should have been negative for the Japanese yen…
… the playbook said that the policies of Prime Minister Takaichi would be negative for the yen, and that a strong victory in Sunday’s election would exacerbate this trade.
Indeed, her time at the top has already presided over a notable decline in the yen.
However, following news of her party’s massive victory on Sunday, the yen has responded by strengthening.
“The JPY trades pretty okay despite a landslide victory for the LDP. You can argue that the Takaichi victory was mostly priced in,” says Brent Donnelly, analyst at Spectra Markets. “The sell JPY and sell JGBs trade are tired.”
The market looks to have front-run the event itself, and hefty ‘short’ positioning on the yen means it was ripe for a correction once the outcome became known.
Takaichi’s Liberal Democratic Party secured 316 of 465 seats in the lower house, securing the largest victory for any party in the post-war period.
“With a two-thirds supermajority, Takaichi now has scope to override the upper chamber, potentially clearing the way for expansive fiscal measures and constitutional reform, and giving Japan a degree of political stability rare among advanced democracies,” says Karl Schamotta, an analyst at Corpay.
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The promise of stability is attractive to investors and is certainly reflected in the Nikkei’s rally to record highs on the news.
“As domestic yields rise and growth improves, repatriation flows could begin to build. Political clarity and a stronger outlook may also attract foreign capital,” says Schamotta.
Takaichi’s economic philosophy is summed up via government fiscal stimulus and low interest rates, which raise concerns about the sustainability of the country’s debt pile. It’s why Japanese bond yields have torn higher and why the yen hasn’t followed suit.
However, in her first speech following her party’s victory, Takaichi confirmed that deficit bonds will not be issued to fund the sales tax cut proposal.
Citi’s macro strategist Jim McCormick says that for the PM to make a statement on deficit bond issuance in her first speech, it shows she is well aware of the constraints the market will put on any fiscal plans.
Despite constructive price action, it’s of course far too soon to call a turn in the trend for the yen. For now, we’d respect the story the charts tell us, and that momentum favours ongoing JPY weakness.
It will nevertheless come as a relief to Takaichi that the markets didn’t fall out of bed on Monday.
AloJapan.com