Japan: PM Suga to resign, what does this mean for JPY? – MUFG

Japanese Prime Minister Yoshihide Suga announced he would step down after barely one year at the job. Japanese stocks reacted positively, jumping by some 2%, but USD/JPY remained stable at around 110 ahead of the Nonfarm Payrolls report. Economists at MUFG Bank believe the yen is set to suffer a mild depreciation.

Coming change in leadership will be the catalyst for additional policy action 

“Currently, Fumio Kishida, the Foreign Minister, is the only declared candidate having declared before Suga’s announcement today. A popular choice according to polling would be Taro Kono, who is currently running the COVID-19 vaccine rollout, which got off to a slow start but has improved of late. Shigeru Ishiba, a former defense minister, who ran against Suga last year is another. There may well be some speculation of a return for Shinzo Abe, although that appears unlikely.”

“At this early stage, we are not surprised with the initial financial market response. While the FX response was muted, the Topix Index did rally and has just closed up 1.6% at the highest level since 1991. Japan stocks have underperformed and this could be a catalyst for some short-term catch-up.”

“Of the three candidates above, Taro Kono is perhaps the most cautious and advocates more fiscal prudence but whoever wins some form of fiscal policy stimulus is likely. Budget data released on 30th July revealed untapped fiscal spending from previous plans pointing to scope for action.”

“This backdrop of additional stimulus under changed leadership that does not fuel speculation of any sudden or dramatic move away from the broad meaning of ‘Abenomics’ could imply some modest JPY weakness. However, UST bond yields will remain the primary driver for USD/JPY and hence today’s NFP data will as usual be important. The scope for JPY weakness will also likely be relatively modest.”