【MACRO Alert】 Economic policy and the future of the yen - the choice of Japan's new prime minister

The risk of yen intervention has once again become a focus for investors as they prepare for a fall back to 150 or even lower against the dollar. After falling for two consecutive weeks, the yen fell to 149.98 on Monday, posting its worst drop since 2009 in the five days to October 4. The prospect of further yen depreciation has prompted strategists to warn of increased risk of intervention around the 150 mark or the 200-day moving average of 151.25.

Recent cautious comments from Japanese officials mean that the market now does not think the interest rate gap between the U.S. and Japan will narrow as quickly as previously expected. Japan's new Prime Minister Shigeru Ishiba said Japan is not ready to raise interest rates, while strong U.S. data prompted traders to reduce bets on U.S. monetary easing. Federal Reserve Governor Waller said on Monday that the Fed should be cautious in cutting interest rates. Takuya Kanda, head of research at Gaitame.com Research Institute in Tokyo, said the key is whether the yen will fall below 152, a key level for the yen, because the last time it fell below this level, it quickly fell to 160.

Japanese authorities intervened in the market in July when the yen hit a 38-year low against the dollar. The yen fell to 161.95 in early July before rebounding sharply and returning to 149.98 at the end of July. Five yen buying moves have seen the Japanese currency appreciate by more than 5 yen on average from 2022 to the first half of this year, according to data compiled by Bloomberg. Japan's chief monetary official, Atsushi Mimura, said earlier this month that he is closely watching movements in the foreign exchange market, including speculative moves.

However, strategists remain divided, with some arguing there is still a long way to go before authorities decide to return to the market. "Unless the yen depreciates beyond 160, intervention will not be taken," said Eiichiro Miura, head of strategic investment at Sunshine Asset Management. Data from the U.S. Commodity Futures Trading Commission (CFTC) as of Oct. 8 showed that leveraged funds' net long yen positions fell for a second straight week, suggesting their bullish sentiment has weakened. Even so, Keiichi Iguchi, senior strategist at Resona Holdings Inc., said the yen would face selling pressure if expectations for U.S. rate cuts were revised. "If the yen continues to weaken, we need to intervene cautiously," he said.

This election was partly because his opponent, Sanae Takaichi, had a too right-wing political stance, and partly because Ishiba‘s pragmatic and utilitarian diplomacy was more in line with the current chaotic world situation. From an economic policy perspective, Ishiba’s goals are more ambitious and his policies are bolder: he plans to raise Japan‘s minimum wage to promote consumption, adjust some sales taxes, and emphasize the importance of investment to the economy; he supports the Bank of Japan’s gradual interest rate hikes, strengthening the yen by raising interest rates, thereby reducing the cost of importing goods; he advocates Japan‘s independent policy, hoping that the yen will reflect its due value and regain its role as a “great power currency.” How Ishiba’s final election will affect the Bank of Japans interest rate hike process is worth paying close attention to.

On the one hand, Ishiba's series of reforms are still based on the economic line of the Kishida government, because Kishida (faction) has made great contributions to Ishiba's election, which means that the Bank of Japan's interest rate hikes still need to be driven by the continued recovery of domestic demand. On the other hand, Ishiba's election may also make Japan's monetary policy decision-making more "black box". After his election, the Nikkei index futures once fell by more than 4%, and the yen appreciated rapidly, which reflected that Ishiba's election gave the Bank of Japan more confidence to raise interest rates. From a purely economic perspective, Japan is only slowly gathering the possibility of raising interest rates: nominal wage growth drives the recovery of real purchasing power, but household spending is still relatively cautious. However, under the politicization of global central banks, it cannot be ruled out that Ishiba will urge the BOJ to raise interest rates again to prove his political existence.

Although it has been nearly half a year since Japan said goodbye to negative interest rates, investors in the Japanese stock market are still "focusing on the yen and the Nikkei". Before the "Ishiba Route" becomes clear, the high volatility of the yen and the subsequent high volatility of Japanese stocks will continue. The yen is still one of the most important financing and safe-haven currencies in the world. The high volatility of the yen is a sword of Damocles hanging over the heads of the global capital market.