Why Political Chaos Leaves the Japanese Yen Cold

In the run-up to national elections, the Japanese prime minister has suddenly resigned. Prices are shooting up in the stock market, but the yen is surprisingly barely moving.

Japanese Prime Minister Yoshihide Suga recently announced his resignation at the end of September. That shows strange timing, because in the autumn the country goes to the polls. In the run-up to those elections, a power struggle is now emerging within his LPD party over who will succeed Suga as party leader and prime minister. Yet Suga's choice to step down now is less strange than it seems.

Since he took over from his predecessor Shinzo Abe on September 16 last year, Suga's popularity has fallen sharply. This has everything to do with his half-hearted approach to the corona crisis. He lifted the travel ban too soon and reversed that mistake too late. As a result, relatively strict lockdown measures will be in place in large parts of the country for almost all of 2021.  

Departure Notice
The stock market opened up champagne after the departure announcement. The well-known Nikkei 225 Index shot up 4% in the days following the news. And the Topix Index, which also includes many smaller companies, even rose to its highest level in more than 30 years. With a different leader than the unpopular Suga, the market-friendly LPD has a better chance of winning the elections later this year. He or she may also be better able to handle the pandemic.

In the course of this month it will become clear who exactly will be the successor. The campaigns will start on September 17. The votes will be counted on September 29. Former Foreign Minister Fumio Kishida had already applied before Suga's resignation. He wants to free up huge amounts for virus control and also focuses his campaign on income inequality. His biggest opponent is Taro Kono. Kono is responsible for the vaccination policy, which has picked up steam in recent months after a difficult start.

Stay awake
However, political chess leaves the yen remarkably cold. As Japanese stock prices skyrocketed, the currency moves in a narrow range of 109 to 111 against the dollar. An important reason for this currency calm is that the economic plans of the politicians within LPD do not differ widely. However, the yen may well end up in more turbulent waters later this year.

This can happen, for example, if there are signals that the LPD does not obtain an absolute majority in the national elections. In addition to political uncertainty, financial turmoil can also cause the yen to fluctuate sharply. The currency is known as a safe haven in uncertain times. For example, during the corona panic in the spring of 2020, the currency shot up by more than 8% against the dollar. It is therefore important to resist the temptation to let the lukewarm price reaction to the Suga departure lull you to sleep.  

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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