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Should Abe lose the leadership election,  it could have an important bearing on the JPY, although no one on the BoJ board will be leaving until March 2020, according to Amy Yuan Zhuang, Chief Asia Analyst at Nordea Markets.

Key Quotes

“We would expect some sort of positive risk premium to start showing the JPY as we get closer to the election. An implied probability that Abe will not remain in power should be seen as positive for the JPY.”

Since Abe took over the reign in Japan, USD/JPY has moved from just above 80 to the current levels around 110 –  mostly driven by the decision to go “all-in” money printing via the QE programme in the fight for inflation in Japan. A decision that was taken roughly a quarter after Abe took office. Should Abe lose office, it will thus not be a surprise to see short-term speculations driving USD/JPY towards 100 – although the Bank of Japan policy-makers would likely be reluctant to change stance on the easy monetary policy any time soon.  So far, we don’t judge that any significant positive risk premium is priced into the JPY from this story.”

“However, our base case is that Shinzo Abe will stay in power and in such a scenario the Bank of Japan’s policy will be business as usual.  Throughout 2017 and 2018 the Bank of Japan has actually tapered asset purchases, but it should not be perceived as an intentional policy signal. The reason for the slowing of purchases is simply that it has become increasingly “stress-free” to defend the 0 % yield-curve target for the 10yr Japanese bond-yield.”

“The most recent political turmoil in Italy has likely decreased the pressure on the Bank of Japan in its yield-curve control. This is after three months in a row of increasing JGB purchases by the BoJ, probably as a result of spill-over effects from the rising long treasury yields.”

“But while the Bank of Japan may have tapered its asset purchase pace over the past year, the same has been the case for the ECB, while the Fed has even started shrinking its bond portfolio over the same period.  So we continue to judge that it is most likely that the Bank of Japan will outprint its peers in the ECB, Fed and BoE, which is one of the reasons why we see a relatively weak JPY against the EUR, USD and GBP in our  financial forecasts. Recently not just global headwinds for yield-curve control have emerged. Also domestically we see signs that the Japanese inflation pressure has peaked already.”

“Our base case is therefore that both EUR/JPY and USD/JPY will move higher beyond of short term, but we have to acknowledge that the current developments in Italy, the risk of Abe stepping down and also the risk of more pronounced risk-off  could wreak havoc with our negative 1-year view on JPY.”