Shi Po Mao becomes a new variable for the Japanese Yen

Events since 2024 have shown us that, compared to changes in economic factors, significant nonlinear changes in non-economic factors may be more important, leading to many deviations between market expectations and reality.

We have not seen the "Wile E. Coyote moment" of the U.S. economy (a classic cartoon character who runs desperately towards a cliff, only to realize his feet are dangling over the edge after running far, and then plummets straight down), nor have we seen a manufacturing recovery after the ECB rate cut. Instead, we have witnessed rounds of "unknown unknowns" shocks caused by super election years overlapping with geopolitical conflicts (a tongue twister from former U.S. Secretary of Defense Rumsfeld).

Local small parties in India have united, resulting in Modi's significantly lower-than-expected seats in the general election, adding more obstacles to the reform path. The rise of the right-wing in France led to Macron's defeat in the European Parliament elections, forcing him to hold early domestic elections, delaying fiscal restructuring once again.

But the most impactful events include Biden, as the incumbent U.S. president, announcing his withdrawal less than 4 months before the election, and the bullet in Pennsylvania that was only 0.6cm away from Trump's head.

Japan is not to be outdone, as since his defeat against Abe in 2012, Ishiba Shigeru, who raised the banner of "anti-Abe economics," has been silent in Japanese politics for over a decade.

In a country like Japan where prime ministers change frequently, each one needs to find a different way to demonstrate their political presence to be remembered by the people (while preserving their political legacy).

His election this time is partly due to his opponent Takamatsu Saonae's overly right-wing political stance, and also because Ishiba Shigeru's pragmatic and utilitarian diplomacy is more in line with the current chaotic global situation.

From an economic policy perspective, Ishiba Shigeru has bolder and more ambitious goals:

• Plans to raise Japan's minimum wage to boost consumption, adjust some sales taxes, and emphasize the importance of investment to the economy.

• Supports the gradual rate hikes by the Bank of Japan to strengthen the yen, thereby reducing the cost of imports by raising interest rates.

• Advocates for Japan's independent policy, hoping the yen reflects its proper value, reclaiming the role of a "major currency."

The impact of Ishiba Shigeru's final election on the BOJ's rate hike process is worth close attention.

On one hand, Ishiba Shigeru's series of reforms are still based on the economic path of the Kishida government, as Kishida's faction attributes Ishiba Shigeru's election to their own efforts, meaning that the BOJ's rate hikes still rely on sustained domestic demand.

On the other hand, Ishiba Shigeru's election may lead to a more "black-boxed" decision-making process for Japan's monetary policy. After his election, the Nikkei futures fell by over 4%, and the yen rapidly appreciated, reflecting Ishiba Shigeru's election giving more confidence to the BOJ's rate hikes.

From a purely economic perspective, Japan is slowly accumulating the possibility of rate hikes: nominal wage growth drives real purchasing power restoration, but household spending remains relatively cautious. However, in the context of global central bank politicization, it cannot be ruled out that Ishiba Shigeru may urge the BOJ to hike rates once again to prove his political presence. Over the past few weeks, we have been emphasizing that behind the Fed's interest rate cuts, there may not only be economic factors but also political factors. With Fumio Kishida taking office as the Prime Minister of Japan, the Bank of Japan will also face a similar choice, except in the direction of raising interest rates rather than cutting them.

As the implementers of monetary policy, recent speeches by Bank of Japan officials have been basically the same old tune, repeatedly emphasizing the view that "if economic growth and progress in inflation meet expectations, interest rates will be raised." However, the expectations and attitudes conveyed lean towards caution, leading to the weakening of the yen and accumulating the risk of an unexpected rate hike.

From the perspective of the capital market, Japanese stocks serve as a proxy variable for the strength of the U.S. economy and the degree of monetary policy easing in Japan. Although it has been nearly half a year since Japan bid farewell to negative interest rates, investors in the Japanese stock market still "focus on the yen for the Nikkei." (See "Japanese Stocks, Advance or Retreat?")

Until the "Kishida route" becomes clear, the high volatility of the yen and the subsequent high volatility of Japanese stocks will continue. The yen remains one of the most important financing and safe-haven currencies in the world. The high volatility of the yen is like the sword of Damocles hanging over the global capital markets.

Author: Song Xuetao, Source: TF Securities Research Institute. This article is an excerpt from the securities research report "Fumio Kishida Becomes a New Variable for the Bank of Japan to Raise Interest Rates" released by TF Securities on September 24, 2024