Since Prime Minister Sanae Takaichi’s landslide election win on February 8, the Japanese stock market has soared to all-time highs, bond yields slumped and the Japanese Yen became less weak.
Against the US dollar, the exchange rate has dropped from 157 to 153, extending the broad pattern beneath the critical 160 level.
A static exchange rate and soaring equities means that real returns are being achieved by both locals and foreign investors.
A quick look at the iShares MSCI Japan ETF (EWJ) shows that the multi-year uptrend is accelerating. The breakout at 72 was gradual at first, but consistent buying pressure is now driving the equity fund relentlessly higher. Upside target pencilled in at 100.
Now, back to the Yen. For many quarters, the Japanese Yen was one of the weakest currencies amongst developed economies. At the opposite end lies the Swiss Franc – the world’s strongest currency.
Will the Yen remain weak during Takaichi’s premiership?
On the daily Yen-USD chart, the rate hasn’t really made new lows for 18 months now, suggesting a loss of momentum. This broad sideways pattern is largely caused by USD weakness.
Against GBP, EUR, and CHF, however, the Yen did edge to new long-term lows this year. But the seismic political event seems to have caused a Yen rebound from these lows.
GBPJPY, for example, dropped to 8-week lows (JPY stronger); the downside target is at 205.
Another important factor not to be overlooked is that the Bank of Japan may increase the policy rate from the current 0.75% later this year. This may lead to further yen strength over the medium term.[1]
Therefore, unless the Yen resumes its weakness soon, the possibility of a bout of Yen appreciation is not to be ruled out.
