Source: Wall Street See
Author: Zhang Yaqi.

Shigeru Ishiba unexpectedly elected as the Prime Minister of Japan, the Japanese Yen staged a major turnaround, soaring significantly against the US Dollar, Japanese government bond futures fell, and the Nikkei 225 index suffered a heavy blow.

On the evening of the 27th, after Shigeru Ishiba was elected as the new leader of the Liberal Democratic Party of Japan, the Nikkei 225 index futures trading plummeted by more than 2000 points in the session and triggered a circuit breaker.

On that afternoon, former Secretary-General of the Liberal Democratic Party of Japan, Shigeru Ishiba, won the majority of votes in the second round of the party's presidential election. Previously, the market had been expecting another candidate, Sanae Takaichi, to win. She had stated earlier this week that she hoped the Bank of Japan would maintain its loose monetary policy.

As tradition, the newly elected Liberal Democratic Party Chairman, Shigeru Ishiba, is expected to succeed as the Prime Minister through a parliamentary designation election on October 1st. The current Prime Minister of Japan, Fumio Kishida's term as the Liberal Democratic Party Chairman will end on September 30th.

After experiencing a rise against the US Dollar earlier this morning, the Japanese Yen is now stable around 143 yen.

How will the changes in the Japanese political situation affect the policies of the Bank of Japan?

With Fumio Kishida's election, it has influenced the market's expectations for the future policies of the Bank of Japan, especially the sustainability of the Bank of Japan's monetary policy stance.

Earlier this week, Haruhiko Kuroda reiterated the Bank of Japan's stance in his speech, stating that if the data supports it, the central bank will raise interest rates again, but will not rush to do so. Some analysts believe that his remarks indicate a low likelihood of policy action by the Bank of Japan at next month's meeting.

Shoki Omori, Chief Trading Desk Strategist at Mizuho Securities in Tokyo, stated:

"Many yen shorts have been hit, especially speculators and short-term funds. With Fumio Kishida set to be the next Prime Minister, all expectations regarding risk appetite and potential reflation policies have dissipated. Clearly, many investors originally expected loose policies to persist for a longer period, so they may have re-entered arbitrage trades or shorted the yen, but now all shorts are being closed. The Bank of Japan will proceed with policies based on data.

Some analysts believe that Fumio Kishida's hawkish stance may boost the yen, and it is expected that the Bank of Japan may raise interest rates in the future, especially in December. Alex Loo, Macro Strategist at Daiwa Securities, said:

"Fumio Kishida's past remarks indicate he is a monetary hawk, hence yen bulls are encouraged. Today's outcome reinforces our belief that the Bank of Japan will raise interest rates again in December this year, and the narrowing US-Japan interest rate differential could push the dollar/yen back to the 140 yen level.

Valentin Marinov, a strategist at East-West Bank, stated:

"Fumio Kishida's unexpected victory may inspire a bullish trend for the Japanese yen, as this may trigger expectations of further policy normalization by the Bank of Japan, possibly as early as October."

Furthermore, any actions that may deviate from the fiscal radicalism of Abenomics could have significant implications for yen carry trade. In particular, any attempts to reduce debt and/or a wave of corporate restructuring could potentially stimulate capital inflows into the yen in the long run, thereby impacting yen funding carry trades.

Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd., stated:

"The new cabinet under Fumio Kishida's leadership is expected to broadly support the Bank of Japan's current gradual policy normalization plan, which should lift the yen in the coming months. Our base forecast is for the Bank of Japan to raise interest rates by another 25 basis points in December, with the USD/JPY pair further declining to 135 over the next 12 months."

Some analysts also believe that the market reaction has been excessive, and the fundamental outlook of the Japanese economy is unlikely to change suddenly in the short term. Hiromi Yamaji, CEO of JPX, stated:

"The market's reaction to the results of the LDP election has been exaggerated, and it is not believed that the stock market and economic fundamentals will change suddenly. It is expected that Fumio Kishida will continue to implement stock market policies such as the NISA tax-exempt investment plan."

Editor/Jeffy