The Liberal Democratic Party of Japan has selected Shigeru Ishiba as its new leader, and he can be the next prime minister. It was a small surprise that Ishiba was chosen – but a very positive one for the Japanese Yen (JPY), Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

The attempt at monetary policy normalization to end in failure

“Observers had mentioned Sanae Takaichi, among others, as a promising candidate to succeed outgoing Prime Minister Fumio Kishida. However, Takaichi is considered an outspoken opponent of the restrictive BoJ policy. If she had been named the new prime minister, there would have been a possible return to the ‘Abenomics’, including an ultra-expansive monetary policy.”

“This option is off the table with Friday's decision. Although Ishiba has so far made a name for himself primarily in defense and foreign policy issues, he has signaled sufficiently clearly that he is at least not averse to the restrictive BoJ monetary policy. A new edition of the Abenomics will certainly not happen with him. Therefore, it is only logical that the news was greeted by the currency market with very significant JPY strength.”

“BoJ's current policy is likely to fail. It will not lead to lasting inflation, but to a relapse into old zeroflation, and that therefore the attempt at monetary policy normalization will end in failure. The remaining inflation does not result from labor-intensive service prices, but predominantly from goods prices. It is therefore more the result of past yen weakness than a sign of a self-sustaining inflation process. The JPY recovery of the past months will likely cause this effect to disappear soon.”