- Japanese Prime Minister Shinzo Abe is set to step down after nearly eight years in office.
- The safe-haven yen reacted with a rise amid uncertainty about the succession.
- Economic policy is set to remain on course under any replacement, leaving room to recover.
The end of an era – that is how several media outlets have described reports that Japan's Prime Minister Shinzo Abe is stepping down. The country's longest-serving leader – in his current run since 2012 after having served beforehand – is struggling with a chronic ulcer-related disease that may have been exacerbated by stress.
Childless Abe is the father of "Abenomics" – an economic policy that consists of monetary stimulus, fiscal stimulus, and reforms. While Japan has been moving slowly on making structural changes, the Bank of Japan and the government have been pouring money on the economy.
Japanese stocks dropped and the safe-haven yen jumped in a quick response to the news.
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Before Abe's era, the world's third-largest economy had six prime ministers in as many years. A return to political instability prompted the knee-jerk moves.
However, it is essential to remember that Abenomics is set to carry on – especially amid the coronavirus crisis. Governments all over the world are doing whatever they can to provide relief and stimulus, and Japan – under any leader – is no different.
The most significant continuation candidate is finance minister Taro Aso, which has been a proponent of Abenomics. Cabinet minister Yoshihide Suga is another confidant that would reassure markets. Even if another successor is elevated to lead the country, there is little doubt that the current economic policy is at risk.
The safe-haven yen rises in times of trouble – even if the issues stem from Japan. However, once the dust settles, investors could sell the currency and focus on other topics, allowing USD/JPY to recover.
Apart from ongoing Abenomics, another reason to favor long dollar/yen positions is the recent speech by Jerome Powell, Chairman of the Federal Reserve. The world's most powerful central banker announced a new policy stance on Thursday – allowing for higher inflation and markets reacted by pushing US bond yields higher.
USD/JPY is highly correlated with returns on American debt and further reactions to the Fed's new policy will likely underpin the currency pair.
All in all, the Abe-related response may have been exaggerated and may provide a buying opportunity on USD/JPY.
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