Synopsis:
Credit Agricole discusses the potential scenarios for USD/JPY as Japanese bulls focus on the upcoming LDP presidential election. The outcome could significantly influence Japan's monetary policy and the JGB yield curve, with various candidates representing differing economic directions.
Key Points:
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Election Significance:
- The LDP presidential election on Friday will play a crucial role in determining Japan's future monetary policy and the dynamics of the JGB curve.
- Two primary forces are at play: “succession” and “pseudo-regime change.”
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Succession Force:
- Sanae Takaichi (25% chance of winning): Aims to address social issues through increased public and private sector investment and maintain the aggressive fiscal policies of the Kishida administration.
- If Takaichi wins, the JGB curve may steepen due to her preference for loose monetary policy. This scenario is likely to be negative for the JPY, as it may slow the BoJ's normalization and widen the US-Japan rate differential.
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Pseudo-Regime Change Force:
- Shigeru Ishiba (20% chance of winning): Focuses on neoliberalism and fiscal soundness, advocating for a quicker pace of monetary policy normalization and reduced fiscal spending.
- An Ishiba victory could flatten the JGB curve, and the fall in the US-Japan short-term rates spread would likely strengthen the JPY.
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Conciliation Candidate:
- Shinjiro Koizumi (20% chance of winning): Represents a blend of policies, promoting deregulation while continuing aggressive fiscal strategies. A Koizumi win may lead to a moderate steepening of the JGB curve and weigh on the JPY due to slower monetary policy normalization.
Conclusion:
The upcoming LDP leadership election is critical for the USD/JPY outlook, with the potential outcomes varying significantly in their implications for Japan's economic policies and currency strength. Investors should closely monitor the election results and subsequent monetary policy signals, as they could lead to notable fluctuations in the USD/JPY exchange rate.