FX Update: JPY rising fast on Abe resignation

Forex 3 minutes to read

John Hardy

Head of FX Strategy

Summary:  The JPY is rising fast in the wake of an announcement this morning that Japanese Prime Minister Shinzo Abe is set to resign. This could lead to a power vacuum in Japan and less certainty over the fate of Japanese fiscal policy, just at the historic moment when we are seeing the shift to fiscal primacy after the era of central bank policy domination. JPY volatility can upset the apple cart across markets, so traders must tread carefully.


Note: Fed Chair Powell Speech was not a game changer. Prime Minister Abe leaving office is. And the sudden injection of JPY volatility can be significant enough to send a shockwave through all global markets – something younger participants in the market in particular may not be aware of.

Why is JPY strengthening suddenly?

The JPY is rising fast after the announcement early this morning that Japanese Prime Minister Shinzo Abe will resign due to health reasons, though he will apparently look to serve out his term as party leader through September of next year. The JPY is rising because Abe was the longest serving PM since the end of WWII and had brought a new forcefulness to economic policy in combination with the Bank of Japan’s Kuroda starting in 2013 and their “three arrows” programme of Abenomics, much of which was the BoJ Kurodanomics in truth, but with future policy reliant on the Japanese government’s fiscal and BoJ’s monetary policy working in coordination. With Abe’s exit, the risk is that the days of Japan’s shakier political leadership could return and lead to a more muddled and weak government policy. In a global context, we have a transition period in which clearly fiscal authorities are taking charge of policy now that virtually all central banks are at near-zero or negative policy rates, this is a “dangerous” moment for Japan, or at least shifts the uncertainty drastically that Japan will always be the country pursuing the most radical policies to avoid currency strength in particular – a key component of Kurodanomics in particular.

The timing of the announcement overnight was quite interesting, because the JPY was actually trading sharply weaker since late yesterday in the wake of Fed Chair Powell’s speech yesterday outlining the Fed’s new “flexible average inflation targeting” policy, which saw US treasuries weakening sharply. That move has partially reversed as well – and a full reversal of that move with lower yields would add potency to any JPY appreciation move here. Watching the 105-104.50 area in USDJPY especially for major shift in the outlook for the JPY, but also for a reversal today after major new highs were posted in many other JPY crosses.

Keep an eye on JPY and stay tuned and stay careful out there. The Fed Chair Powell Speech was not a game changer as he was short on specifics and the changes were well flagged in advance. The exit of Abe from the stage is a gamechanger.

Chart: USDJPY
USDJPY is the benchmark for all JPY pairs - but look at the JPY broadly if the USD remains weak if broad market volatility returns (doubtful that USD would stay broadly weak in those circumstance). As noted, the 104.50-105.00 level is critical for the USDJPY outlook.

Source: Saxo Group
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.