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Yen Jumps, Japan Stocks Sink After Reports Say Abe Plans to Quit

Yen Jumps, Japan Stocks Sink After Reports Say Abe Plans to Quit

Japanese stocks slumped while the yen jumped after Prime Minister Shinzo Abe said he would resign to undergo treatment for a chronic illness, raising questions over the future of his signature stimulus policy.

Volatility surged, with the benchmark Topix index finishing the Friday session down 0.7% after sliding as much as 1.6%. The currency, which has been kept in check by so-called Abenomics, rose as much as 1% against the dollar to 105.50.

Yen Jumps, Japan Stocks Sink After Reports Say Abe Plans to Quit

“Abenomics may have had split views, but the fact that they put forward a clear policy of getting out of deflation was a positive for the equity markets,” said Hiroshi Matsumoto, head of Japan investment at Pictet Asset Management. “It’s not the end of the world for the Japanese economy, but we cannot clearly see who the successor will be. And there’s a question of how much Abenomics policies will be carried forward.”

Abe came to power for the second time in 2012, touting new plans to revive the economy through unprecedented monetary easing and regulatory reform that was eventually labeled “Abenomics.” Few market participants had expected he would step down after his right hand man, Chief Cabinet Secretary Yoshihide Suga, said Abe should be able to serve out the remainder of his term as a party leader.

Yen Jumps, Japan Stocks Sink After Reports Say Abe Plans to Quit

The prime minister confirmed reports in a press conference that he was dealing with ulcerative colitis, a chronic digestive condition that also forced him to step down as premier in 2007. He said he would stay on until party leaders hold an internal vote to pick a successor, and then he would like to remain a lawmaker after handing over power.


Policy Continuity

Still, should Abe be replaced by Suga or former foreign minister Fumio Kishida, there would be policy continuity, analysts had said earlier. Finance Minister Taro Aso filling his shoes would also reduce pressure on the yen, they said.

“It came as a surprise as traders weren’t expecting this to happen today,” said Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui DS Asset Management Co. in Tokyo. “The yen could extend gains when more overseas players enter the market. But the advance will be limited as the market is expecting Japan’s current fiscal and monetary stimulus policies will be maintained amid the coronavirus crisis no matter who succeeds after Abe.”

Market focus will also shift toward the Bank of Japan, where Governor Haruhiko Kuroda had worked hand-in-hand with the prime minister to combat deflation by introducing negative rates and buying huge amount of bonds and stocks.

“Resignation brings into question support for Abenomics, and of course support for Kuroda’s BOJ ultra-easy policy,” said Rodrigo Catril, senior FX strategist at National Australia Bank Ltd. in Sydney, who sees the yen at 103 against the dollar by year end.

The BOJ is going to continue with its current monetary easing to meet its objectives, making no immediate changes, despite Abe’s resignation, according to people familiar with the matter.

Here is what other market participants are saying:

CLSA Ltd. (Nicholas Smith, strategist)

  • “What Abe’s been brilliant at, is, banging people’s heads together and making sure that things get executed and he’s been surprisingly successful at that”
  • “I think that whoever replaces Abe will have very similar policies and strategies”
  • “The markets are going to be uncomfortable with the uncertainty, there will be a lot more clarity after the press conference at 5 o’clock. The truth is Japan has been remarkably successful in handling the coronavirus and I think the succession is likely to allow a few tweaks policy that are probably in the works anyway”

Mizuho Securities Co. (Kengo Suzuki, chief foreign-exchange strategist)

  • “Abe’s resignation means the probability is rising for an end to Abenomics which, together with BOJ’s aggressive easing, led the yen to weakness. That’s boosting yen buying, as well as risk aversion on uncertainty over what comes after Abe”
  • “The key is whether there is any change to the BOJ’s monetary policy”
  • “The knee-jerk reaction is more likely to be short-lived as there are other factors of concerns for the market including the coronavirus, economic impact, U.S. presidential election and the U.S.-China tension”

Nordea Investment (Sebastien Galy, macro strategist)

  • “Japan likes continuity, which means that whoever replaces him will continue more or less in the same direction. The question is whether they will be willing to shake up the status quo as much as Abe was quite unique in this such as revamping the military stance of Japan faced with China”
  • “The odds are that it will take some time for his replacement to reach the same point, yet there could also be opportunities. JGBs will be were they were before in a few days, equities also this is just risk management. The open question are policy choices taken in the next few months. We would hence simply faded the risk”

Malayan Banking Bhd. (Yanxi Tan, FX strategist)

  • “The sharp falloff in dollar-yen when the news broke clearly signals concerns over fiscal and monetary policy continuity”
  • “The yen could remain in demand for a while until his successor can convince markets that policy on various fronts will remain sufficiently supportive or accommodative as the economy battles with, and emerges from Covid-induced drags”

Asymmetric Advisors (Amir Anvarzadeh, a senior strategist)

  • “Although the market has reacted negatively on concerns about yen’s direction and the future of Kuroda at BOJ, this knee jerk reaction will pass”
  • “Abenomics has not really been on the agenda for years and had all but lost its momentum when Abe folded under MOF’s pressure to raise consumption taxes which derailed any growth trend there was left”
  • “We don’t think Kuroda-san from BOJ will leave anytime soon but given his failed experiment in trying to boost inflation even before the pandemic, and having killed the financial sector with his zero rate policies, he will not be hugely missed either”

©2020 Bloomberg L.P.