Yen Surges Following Abe’s Resignation

Yen Surges Following Abe’s Resignation

Published: September 1st, 2020

 Shinzo Abe, Japan’s longest-serving prime minister, announced on Friday, August 28, that he is stepping down. The rather abrupt decision brings to an end the tenure of an otherwise still very strong leader. Shinzo cites a chronic illness as the reason for his resignation. The same reason he gave when he resigned for the first time in 2007. His announcement has triggered a risk-off response in Japan.

Japan’s longest-serving prime minister, Shinzo Abe, announced on Friday, August 28, that he is resigning from the position because of a chronic illness. While the decision seemed abrupt, it is not surprising since his failing health is why he resigned from the position the first time in 2007.

The issue of the prime minister’s health surfaced again a few weeks ago. Shinzo underwent a medical checkup, and upon getting the results, a close associate of the leader announced to the public that the prime minister is overworked and might need a few days of forced leave.

The announcement seemed strange since no indications showed that Shinzo was working too hard. If anything, his countrymen have repeatedly criticized him for not doing enough to contain coronavirus and its economic impact.

Shinzo has been largely absent from the public since the pandemic was first reported in Japan in January. Instead, he has preferred to pop up only occasionally to share with the country some ill-conceived policies.

Besides, he is tainted by several past scandals. He is yet to provide a proper account of these to the Japanese public.

Now, His Departure is Creating Uncertainty

The abrupt-yet-not-so-surprising departure of Abenomics’ father caused market uncertainty on Friday, August 28, and through the weekend. The announcement affected the stock negatively, with most equities dipping. The safe-haven yen, however, shot up.

The larger share markets were mixed, probably because investors worried about the Federal Reserves’ lack of adequate information regarding the U.S.’s policy shift.

On Friday, August 28, the Nikkei 225 share index slid 1.4%, but the Japanese yen gained about 1%. Lou Brien, a strategist at the Chicago office of the U.K.-based DRW Trading, said the yen is gaining because of the slight uncertainty that Shinzo’s announcement caused.

The gains, he said, testify just how influential an economic strategy Abenomics is. The Japanese public has been speculating about their prime minister’s health for much of last week. However, his abrupt resignation unnerved the markets, especially because he has advocated for efforts to revive economic growth using his reflationary policies that the financial world now refers to as Abenomics.

The yen, seen as a haven currency during economic turmoil, initially jumped 1.2% to stand at 105.33 for every dollar. The surprise increase set the currency on its way to its biggest single-day surge since March 2020.

Some analysts think that the yen’s rally is extravagant. They added that while the prime minister’s announcement caused uncertainty, it is unlikely that Shinzo’s successor will greatly alter the country’s economic policy. These economists think that Japan needs to stay true to its battle to lift growth and eliminate inflation. They said that, given these circumstances, the rise should have been modest at best.

Altering the course of the country’s economy using new policies will do more harm than good. The economists concluded.

Thu Lan Nguyen, a forex analyst at Commerzbank, echoes these remarks. The analyst said that while it is not clear the kind of policies Shinzo’s successor will adopt, it is unrealistic for any such policies to cause a significant change, especially towards more restrictive approaches.

Meanwhile, at the Fed Reserve

The greenback resumed its downward trend against a basket of major currencies after the Fed Chair, Jerome Powell, addressed the media at the virtual Jackson Hole conference.

Powell said the Federal Reserve would try to maintain inflation at about 2%. He added that his agency opted for this strategy to allow periods of too-low inflation to interchange with moments when the government tries to lift the economic swell at above 2%.

Essentially, investors expect the ultra-low interest rates to remain as it is in the meantime. In doing so, the economy will pile more pressure on the dollar.

Overall, the share markets have been turbulent. Most traders expressed disappointment at the Federal Reserve’s failure to provide enough information about how the framework it presented will work.

The traders felt the Federal Reserve should have provided clues about how it will conduct itself at the next policy meeting. Colin Asher, a leading economist at Mizuho, said that informing the public that inflation is a reality is not important. Rather, the economist added that the Federal Reserve should have spelled out its plans about getting inflation to hit the target. He said the challenge is to get to the targeted figure, and Jerome did not explain these plans.

Euro Stocks Ruffled, Asia Rise

In Europe, the situation was pretty much the same. The Euro STOXX 50 slumped 0.21% while Germany’s DAX lost 0.3%. In Britain, the FTSE 100 remained unmoved.

Aside from Japan, the rest of Asia was buoyant. The MSCI’s broadest index for Asia and the Pacific gained 0.22%.

In the currency markets, the euro made the most of the dollar’s slip to jump 0.7%. By the close of the trading session Friday, August 28, the currency was standing at $1.195, almost touching the two-year high it attained recently.

The 10-year U.S. Treasury yield galloped almost 0.8%, its best performance since June 10. As a result, its yield curve steepened, indicating that the Federal Reserve has a higher affinity for inflation.

At the end of the trading session, Friday, August 28, it stood at 0.752%, gaining a basis point during the day.

Final Thoughts

Japan’s longest-serving prime minister, Shinzo Abe, announced on Friday, August 28, that he is resigning because of a chronic illness. His announcement, which was abrupt but expected, caused ripples in the market. Japanese yen, a haven currency, shot up as a result while the dollar slumped. Other haven currencies also surged. However, stocks were not as lucky, with most of them slipping.

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