Why PM Abe’s Resignation Caused JPY Strength
After Prime Minister Abe announced he will step down, one would usually expect such an announcement to be negative for the currency.
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We have two great questions from Thomas and Sergiy asking why the JPY strengthened after PM Abe announced he will step down as one would usually expect such an announcement to be negative for the currency.
Thanks for the great question guys, and the answer is quite simple really, it all goes around the idea of Abenomics, which is a term which has been associated with the specific policies that was put in place by PM Abe since he took office in 2012 to try and get Japan’s economy back on track and to try and get inflation back to the 2% target.
In a nutshell, the policy comprised of three parts, also known as his three arrowed approach, and included fiscal policy with a vast government spending plan for big infrastructure projects to try and boost growth, it included monetary policy where the BOC set out to increase the money supply through quantitative easing which included the purchase of vast amounts of government bonds and etfs, and the aim of that was to try and boost inflation back to 2%, and thirdly it also included some structural reforms that aimed to boost Japan’s attractiveness for foreign investment among other things.
So, to your questions then, why did the Yen strengthen on this news. Well, one could argue that being the JPY, it’s safe haven appeal could have led to some inflows into the currency as Japanese stocks got hammered, but the bigger reason is the uncertainty that PM Abe’s departure means for Abenomics.
If he is away, who will replace him, and will the next PM share the same idea for monetary and fiscal policy. Remember, one of the biggest aims in all this was trying to keep the value of the JPY down, so if someone new steps in with another idea of policy which isn’t aimed at so much stimulus that would be positive for the JPY, and that is why the currency rallied on the back of it.
So, if his successor is announced, what we need to look for in terms of trading opportunities is what their stance will be regarding fiscal and monetary policy, if they affirm that things will continue as is then that provides a selling opportunity in the JPY, but if they come out and give hints that they aren’t so comfortable with the current policy decisions then the JPY could strengthen even more.
Just keep in mind the strength of the JPY is a very sensitive topic for the BOJ so if new policy does see massive support for the JPY then we can expect the BOJ to threaten possible intervention if things get out of hand, and they have done it before so markets will think twice to call their bluff on intervention I think.
So, thanks for the questions guys, please keep them coming.
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