Quick Thoughts: Japan PM Ishiba Resigns

I don’t think we can say that the resignation of PM Ishiba is a complete surprise as it’s been mooted for some time but the timing of the announcement is certainly unexpected. As for the market reaction, this obviously introduces significant downside risks for the JPY and for long-end JGBs when trade gets underway later today/tomorrow morning.

That selling pressure is likely to come first from the market now needing to price a greater degree of political risk, not only in terms of the LDP leadership contest, but also the potential for a general election to be held if the new leader seeks a mandate of their own. There’s also the fiscal angle to consider, with candidates for the leadership all likely to propose looser fiscal stances than Ishiba, hence further pressuring the long end of the curve, where demand for JGBs had already been waning quite significantly.

For the BoJ, all this political uncertainty is likely to be a further delay to the tightening cycle. Policymakers had already been taking an incredibly cautious approach to rate hikes, an approach which they’re now even more likely to maintain as political uncertainty ramps up. Further hikes are, probably, off the cards unless and until the political backdrop becomes much clearer. This more dovish policy outlook also looks likely to pose headwinds to the JPY.