Shigeru Ishiba departs after resigning during a news conference in Tokyo, on Sept. 7.
(Bloomberg) — Japanese markets face the prospect of more instability as investors prepare for the departure of Prime Minister Shigeru Ishiba and the guessing game of who comes next.
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The yen slid as much as 0.7% to 148.42 against the dollar as currency markets reopened at 4 a.m. Tokyo time Monday, after being among the weakest of its Group of 10 peers last week.
Long-maturity Japanese sovereign bonds stand out as being particularly vulnerable to selling when that market gets underway later in the morning, given heightened concerns over government spending. Stocks are exposed to cross currents that make choppy moves likely.
Although expectations for Ishiba’s eventual departure have been present following his ruling party’s poor election showing in July, traders are still trying to determine how much fiscal stimulus may come with potential successors, and to what degree any change could slow the next interest rate hike from the Bank of Japan.
“While it remains unclear who will become the next prime minister, it’s difficult to envision anyone with a fiscal discipline stance better than or even equivalent to his,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management in Tokyo. “The weak performance of ultra-long-term bonds, driven by fiscal concerns, is likely to persist or even intensify.”
Any further spike in JGB yields would be of concern to global markets, which have been on guard for more spillover from Japan into debt trading in Europe and the US. Long-end yields have been rising on renewed fiscal concerns across major economies.
The yen, which ended last week around 147.43 to the dollar, is likely to slide toward the 149.10/20 level, said Tony Sycamore, an analyst at IG in Sydney.
Nick Twidale of ATFX Global Markets sees a chance that a BOJ rate hike comes off the table this year because of the political backdrop. The yen will be “whippy and horrible to trade,” said Twidale. “Rates traders will also be facing heightened risk.”
Swaps markets suggest almost no prospect of a move by the BOJ at its next policy meeting later this month. They don’t price in a full rate hike until next April, and show a chance of just under 50% for an increase by the December meeting of this year.
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