Shinzo Abe unexpectedly resigns. How do market strategists view the yen, Japanese stocks, and Bank of Japan policies?

According to the financial news app Zhitong Finance, on August 14th, Japanese Prime Minister Fumio Kishida announced that he would not seek re-election as the President of the Liberal Democratic Party. This means that after the new President of the Liberal Democratic Party is elected, Fumio Kishida will resign from the position of Prime Minister. Market strategists pointed out that Fumio Kishida's decision not to seek re-election as Prime Minister may pave the way for a new leader who will work towards normalizing the policies of the Bank of Japan.

Following the news, the market experienced fluctuations. The Nikkei 225 index, after rising by 1.3%, briefly turned into a 0.4% decline; the USD/JPY exchange rate remained stable at 1 USD to 146.89 JPY; the yield on 10-year Japanese government bonds fell by 1.5 basis points to 0.83%.

It is reported that in the Liberal Democratic Party presidential election to be held in September this year, former Japanese Defense Minister Shigeru Ishiba, Minister for Digital Transformation Taro Kono, prominent party member Toshimitsu Motegi, and Minister of Economic Security Sanae Takaichi are among the candidates most likely to become the new President.

Here are the views of market analysts on Fumio Kishida's decision not to seek re-election:

Regarding the Japanese Yen and the Bank of Japan, Yujiro Goto, head of foreign exchange strategy at Nomura Securities, stated: "If Fumio Kishida does not seek re-election, people may think that Toshimitsu Motegi or Taro Kono are more likely to be elected. People may be buying the yen because both of them have talked about the need for the Bank of Japan to raise interest rates and correct the weakness of the yen before the Bank of Japan's policy meeting in July." "However, whether they can actually win is another matter, as recent opinion polls show that Taro Kono's support rate is declining, while Toshimitsu Motegi's support rate remains low." He added, "Sanae Takaichi is the only one who may clearly support a more accommodative policy, which could push down the yen again."

It is reported that on July 17th, Taro Kono called on the Bank of Japan to raise interest rates to boost the yen exchange rate and lower energy and food costs. He emphasized the problems caused by the significant depreciation of the yen, including the inflationary impact on domestic prices, and stated that while yen depreciation helps boost exports, it currently has limited benefits for Japan as many Japanese companies have production facilities overseas.

On July 22nd, Toshimitsu Motegi stated that the Bank of Japan should clearly demonstrate its determination to normalize its monetary policy, including gradually raising interest rates. He also stated that excessive depreciation of the yen is clearly detrimental to the Japanese economy.

Yuya Fuue, a trader at Rheos Capital Works Inc., said, "Some speculate that the next Japanese government may support the normalization of the Bank of Japan's policies, as besides Sanae Takaichi, potential candidates for the Liberal Democratic Party presidency such as Shigeru Ishiba, Toshimitsu Motegi, and Taro Kono seem to have a positive attitude towards policy normalization." "However, many investors have been focusing on dealing with market volatility and have not paid much attention to the leadership competition within the Liberal Democratic Party. I don't think today's trading is based on strong convictions."

Eiji Dohke, Chief Bond Strategist at SBI Securities Co., said, "The Bank of Japan will be able to more easily implement a strategy to exit stimulus measures. Fumio Kishida is the most outspoken opponent of raising interest rates at the Bank of Japan Many candidates are inclined towards normalization in the future. However, it has become more difficult for the Bank of Japan to raise interest rates by the end of the year."

Regarding the Japanese stock market, Tomo Kinoshita, Global Market Strategist at Sumitomo Asset Management Japan, said, "Due to the low public support for the Yoshihide Suga government, people may expect changes at the top to boost market confidence and enhance policy implementation." "If Japan's pace of becoming an asset management center slows down, it will have a negative impact on the stock market, as Yoshihide Suga has been highly praised in the financial industry for this initiative."

Shoki Omori, Chief Strategist at Mizuho Securities, stated, "Market participants will not like this uncertain situation, especially those investing in risky assets such as stocks." "The yen will depend on external factors, especially U.S. economic data and the Federal Reserve. Japanese government bonds will continue to be a market determined by supply and demand. My initial view is that the stock market will face the biggest impact."

Charu Chanana, Head of Forex Strategy at Sumitomo Mitsui Banking Corporation, mentioned, "Although Yoshihide Suga's withdrawal may bring some uncertainty, his low approval rating suggests that the stock market may avoid major negative reactions."

Shinichi Ichikawa, Senior Researcher at Pictet Asset Management, commented, "It is difficult to say who will succeed Yoshihide Suga. But whoever becomes the next prime minister, it is almost certain that the parliament will be dissolved, and elections will be held in October or November. This will make it more difficult for the Bank of Japan to take any action, which may start to affect the financial markets."

Andrew Jackson, Head of Japan Equities Strategy at Ortus Advisors Pte, said, "Yoshihide Suga's withdrawal paves the way for Taro Kono to take office. Considering Taro Kono's tenure as Defense Minister during the Shinzo Abe government, this could be another positive news for defense-related stocks." "Although there have been many changes since then and the defense outlook has also become more relaxed, the market may still see it as positive news for companies like Mitsubishi Heavy Industries and Kawasaki Heavy Industries."

Regarding the bond market, Tomo Kinoshita mentioned that Yoshihide Suga has been promoting aggressive fiscal policies, including increasing defense spending, and the new leader may not expand fiscal policies as before, which could have a positive impact on the fiscal soundness of the bond market