Institutional Insights Credit Agricole USDJPY

JPY: bye, bye Abenomics?

 The surprise victory of Shigeru Ishiba in the LDP presidential election
raises the risk of a move away from Abenomics, which has been a source
of structural weakness in the JPY for over a decade.
 It is debatable how quickly Ishiba will move away from Abenomics. He
prevailed in the LDP presidential election with support from members of
the “succession faction”, favouring sticking with former PM Fumio
Kishida’s New Capitalism. Ishiba’s new cabinet, including his Finance
Minister, Kato Katsunobu, suggests that he is not in a rush to dump
Abenomics.
 Japan’s general election on 27 October will be an important gauge of
Ishiba’s ability to overcome LDP factional politics and move away from
Abenomics. A stronger-than-expected showing by the LDP would help
Ishiba solidify his power and potentially move away from Abenomics.
 Our Japan economists expect temporary acceleration in the BoJ’s rate
normalisation cycle and forecast a 25bp rate hike by the BoJ in January
2025 before a long pause in rate hikes as the economy and inflation slow.
 Simulating the impact of the end of Abenomics using our FAST FX model
shows that USD/JPY’s short-term fair value could fall to 139 from 146
currently, if investors’ expectations for steep Fed rate cuts are realised.
If Fed rate cuts are in line with those expected by our US economist and
so less aggressive, USD/JPY’s fair value still declines to 141.
 Ishiba’s premiership is adding to the volatility in USD/JPY by introducing
the risk of a move away from Abenomics. Accordingly, we are lowering
our USD/JPY forecasts for end-2024 from 154 to 144 and for end-2025
from 140 to 138.
 Given the closeness of the US presidential election, we are taking a
neutral view of the outcome in terms of our forecasts. We continue to
think a victory by former President Donald Trump would be a positive for
USD/JPY and a victory by Vice President Kamala Harris a negative for
the exchange rate.