📝LDP Leadership Could Potentially Boost USD/JPY Higher: MUFG

With talk of Mr. Ishiba’s resignation likely to emerge, the market’s attention shifts to the question of who the next prime minister will be. If the new PM is selected from the LDP, and it turns out to be Sanae Takaichi, the reaction of USD/JPY to the previous LDP leadership election suggests this could boost expectations of a revival of Abenomics (accommodative fiscal and monetary policy), potentially sending the Japanese currency as much as a few yen lower against the USD, at least initially (Graph 2). Meanwhile, if the opposition forms a coalition government centering on the CDP, there could be increased speculation of revisions to the joint statement between the government and the BoJ or a review of the BoJ’s inflation target, potentially sending the yen higher at first. That said, the campaign platforms of the opposition parties generally share support for expansionary fiscal policies. If JGB market concerns about a "malignant" rise in bond yields pick up during discussions surrounding the formation of a coalition government, there could be a complex interplay of upward pressure on the yen from higher JGB yields and downward pressure from fiscal concerns. - MUFG