The new Japanese Prime Minister initially pointed to a stronger yen, but a few days into his administration, he suddenly changed his mind.
The value of the yen plummeted on Thursday as the new Japanese Prime Minister showed an unexpectedly dovish approach. Shigeru Ishiba, the new Prime Minister of Japan, was elected party leader last week, replacing Fumio Kishida.
Ishiba was elected leader of the Liberal Democratic Party, which has ruled Japan since 2012. A few days after becoming Prime Minister, Ishiba called for snap elections on October 27th.
“It is important for the new administration to be judged by the people as soon as possible,” Ishiba said at a press conference in Tokyo on Monday.
The Nikkei 225 index, which monitors the highest-valued companies on the Tokyo Stock Exchange, has lost 1.42% since Monday. Markets did not favor Ishiba because they disliked his social democratic approach.
Ishiba often publicly called for a raise in interest rates, which would increase the value of the yen against the US dollar. A stronger yen would entail cheaper imported products (the vast majority in Japan) and overall lower prices for the Japanese consumer.
On the other hand, a stronger yen would make Japanese exports more expensive for foreign markets, an unacceptable prospect for Japan’s mega-corporations that mostly rely of offshore sales.
Japanese politicians historically favored the latter, keeping interest rates low to make Japanese goods more competitive in foreign markets, albeit at the expense of domestic consumers.
Immediate turnaround
Despite his original beliefs, Ishiba immediately changed tune after he was sworn in. On Wednesday, Ishiba met Bank of Japan’s Governor Kazuo Ueda, later saying he believes interest rates should remain low.
“I do not believe that we are in an environment that would require us to raise interest rates further,” Ishiba stated after the meeting.
This sudden change of mind prompted investors to jump on the yen, which reached 146.76 against the dollar after a September low of 140.60.
“This shift is particularly notable as the prime minister has been a long-time critic of past Liberal Democratic Party administrations, including the late Abe Shinzo’s, whose ‘Abenomics’ was associated with monetary easing,” said Stefan Angrick, senior economist at Moody’s Analytics.
Swaps trader brought the possibility of a BoJ rate hike in December to 22% from a previous forecast of 26%. The Bank of Japan will meet one additional time on October 30-31, with analysts divided 50-50 between a hike and a stabilization of rates.
The decision will also most likely be influenced by the outcome of the October 27th elections, which will decide the ruling force of Japan for the upcoming years.
