JPY: Yen weakens as Takaichi’s reflation policies take hold – MUFG

The impact of change in political leadership has been clear in Japan with the yen notably weaker and JGB yields higher as market participants position for reflationist policies under the new leadership of Sanae Takaichi. The weekly cross border flow data was released earlier today by the MoF shows that the positive momentum in demand for Japanese equities by foreign investors is beginning to fade. That overall demand has helped propel a continued strong performance of Japanese equities, MUFG's FX analyst Derek Halpenny reports.

JGB yields rise amid political shift and stimulus package

"The considerable outperformance of Japanese equities (it’s the same vs European equities – over the same period since the weekend of Takaichi’s election victory the Euro Stoxx 600 is close to unchanged) means that hedge-related yen selling by foreign investors has likely picked up if those investors aim to maintain stable hedge ratios. The new inflows are also likely hedged to a high level given it still pays for a foreign investor to hedge their yen exposures, thus enhancing overall returns."

"We suspect the scale of foreign investor demand may start to recede going forward. This week we have had the release of details on the fiscal stimulus package and this was indeed larger than expected at JPY 21.3trn versus a package of JPY 13.9trn a year ago. The government projects a very optimistic economic impact of a lift to annual GDP growth of 1.4% on average over a three-year period, totalling JPY 24trn. We suspect the impact will be a lot less, as is usually the case with stimulus packages."

"In addition, foreign investor demand has likely been fuelled by the continued extreme caution from the BoJ in hiking rates. But the excessive yen weakness and communications from the BoJ suggest to us that the BoJ could indeed hike rates as soon as in December. So the record foreign investor demand could well be about to turn and if Japanese equities take a correction lower, some unwind of hedge-related yen short positions could follow. Making sure this is not too disruptive is probably why the BoJ is attempting to manage this cautiously with communications that subtly signal a shift in stance. Again, watch out for Governor Ueda’s speech on Monday."