USD/JPY: Policy shift could support the Japanese yen – MUFG

Taro Kono, Fumio Kishida, Sanae Takaichi, and Seiko Noda will contest the election on Wednesday, September 29, and all are promising support for the COVID-19 weakened economy. Strategists at MUFG Bank analyze the LDP leadership election and its implications for the Japanese yen.

BoJ changes coming too 

“Three of the four candidates have promised explicit policies of some form of cash handouts but Taro Kono appears most conservative although he too is committed to supportive fiscal policy measures over the short-term to aid recovery from the covid shock. It is therefore tempting to conclude that policy continuation means limited market volatility ahead. This may be true very short-term, but the changes taking place could have medium-to-long-term consequences for the direction of the yen.”

“We would certainly have Taro Kono as the candidate who could attempt the greatest change when it comes to BoJ policy. We can certainly surmise that Kono would be less likely to replace Kuroda with another reflationist, like say Takaichi, or even Kishida might be willing to do.”

“Falling inflation expectations now do throw up questions over the success of ‘Abenomics’ and the changes coming at government level and at the BoJ could reinforce policy uncertainty beyond the short-term COVID-related fiscal support, which could become a factor supporting JPY at these near record weak levels.”