Here’s what a scandal in Japan could mean for the yen
Allegations surrounding Japan’s first lady and a land sale are raising questions about the future of Prime Minister Shinzo Abe, raising questions about the path of the yen.
According to news reports, school-operator Maritomo Gakuen, which has ties to first lady Akie Abe, bought government-owned land below market value. Japan’s finance ministry admitted this week that it altered documents to remove references to Abe, his wife and Finance Minister Taro Aso. Abe denied any involvement by him or his wife on Wednesday.
Analysts said that if the scandal remains centered on the finance ministry, Abe might be fine. But if it spreads further, his position and that of his party could be weakened. Japan only just held snap elections in October, intended to cement Abe’s grip on power.
“There is pressure on finance minister [Taro] Aso,” as well, according to a note from Brown Brothers Harriman strategists, including Marc Chandler. “Reports already suggest he will not attend the upcoming G-20 meeting” in Buenos Aires later this month.
“The scandal is weighing on public support for the government. The good will won by PM Abe on his tough line on North Korea and China and more may have been lost,” the BBH note read.
But what does all this mean for the yen?
Over the past several years, Japan’s steadily accommodative monetary and fiscal policy measures, known as “Abenomics,” have added a premium to the dollar-yen pair USDJPY, -0.31% because quantitative easing typically leads a currency to depreciate.
But the scandal has changed things, as it could lead to Abe losing both popularity and ultimately power, market participants said. His party is due to hold a leadership election in September, in which his chances could be compromised. And without Abe, there might not be “Abenomics” to keep the yen cheap.
The “Abe premium” on the yen has meanwhile fallen to just ¥7, according to RBC’s chief currency strategist Adam Cole, who said he would expect such an adjustment “if Abe were not a candidate at September’s Liberal Democratic Party leadership election.” The peak of the Abe premium was ¥25, according to Cole. One dollar last bought ¥106.30, down from ¥106.58 late Tuesday in New York.
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“Japan’s political situation is on our watch list and offers a significant risk to our tactical call for dollar-yen and other yen crosses to move higher for now,” wrote Morgan Stanley strategists Hans Redeker and Gek Teng Khoo. “If there were a deterioration in the situation which affected the position of PM Abe, we believe the yen would forcefully return towards its previous upward trend.”
Last month, the yen had appreciated sharply against the U.S. dollar in response to volatility across financial markets, which sparked a flight to haven assets like the Japanese currency. And indeed, yen trading is often driven by risk sentiment in global financial markets.
That also explains why the yen’s reaction to the scandal so far has been somewhat muted. Typically, in a risk-off environment, the currency loses some of its charm versus rivals, whereas investors head for Japan as soon as volatility hits or higher risk periods loom, in part due to the yen’s high underlying liquidity.
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