Remember the Shigeru Ishiba yen rally?
If so, you should know that it’s over now.
If not, here’s the briefest-possible version of the backstory. The intra-party LDP jostling to replace Fumio Kishida as Japanese prime minister saw Shigeru Ishiba prevail over Sanae Takaichi. Takaichi opposed additional Bank of Japan rate hikes. Ishiba, by contrast, indicated he’d entertain them, or anyway leave monetary policy to Kazuo Ueda. (That’s what counts as “hawkish” in Japan: Not expressing outward aversion to policy normalization.)
Ishiba’s win — or, more aptly, Takaichi’s loss — triggered a fairly sharp bout of yen strength late last week, a development which conjured uncomfortable memories of late-July / early-August, when ongoing yen appreciation and the accompanying carry unwind collided with soft US labor market data to torpedo risk assets. The yen strength associated with Ishiba’s win / Takaichi’s loss drove Japanese equities to their worst session since the August 5 crash earlier this week.
Fast forward to Wednesday and Ishiba met with Ueda. In remarks that took markets by surprise if not so much for substance than for assertiveness, Ishiba flat out said the BoJ shouldn’t raise rates again. “I don’t think the environment is ready for an additional rate hike,” he said, adding that he told Ueda as much.
As you can imagine, the yen promptly plunged. In fact, October 2 saw the yen weaken the most for any single-session in over two years.
Recall that Jerome Powell seemed reluctant to endorse a second consecutive 50bps Fed cut when he spoke in Nashville on Monday. That juxtaposition — between a marginally less dovish Powell and a public thumbs down to additional BoJ hikes from Japan’s new prime minister — was a recipe for yen weakness.
The yen’s cause was further undermined Wednesday by a stronger-than-expected read on private-sector hiring in the US.
In any case, the dollar-yen rollercoaster continues. More “yen-sanity.” Needless to say — and as more than a few market participants pointed out — specs now have a green light to add back some of the yen shorts that were forcibly unwound from July to September.
The BoJ wasn’t going to hike again this month anyway, but now traders will need to account for political pushback when they consider the prospects for the two BoJ meetings after this month’s.
