Political Risk Rises as Ishiba Resigns in Japan... Bonds and Yen Weaken

Yields on 20- and 30-Year Bonds Rise
Yen-Dollar Exchange Rate Up 0.76%
Investors Remain Cautious, Eyes on Next Prime Minister

Japanese Prime Minister Shigeru Ishiba announced his resignation from the prime minister position, taking responsibility for the crushing defeat in the House of Representatives and House of Councillors elections, at a press conference held at the official residence on the 7th. Tokyo=Photo by Xinhua News Agency

With Japanese Prime Minister Shigeru Ishiba announcing his resignation on the 7th, concerns have emerged that political risk may lead to a simultaneous weakening of the yen and long-term government bonds. However, some analysts have suggested that the current upward momentum in the Japanese stock market could gain additional traction depending on the policy orientation of the next prime minister.

According to CNBC in the United States, as of around 9 a.m. on this day, yields on Japanese long-term government bonds were rising across the board. The yield on 20-year bonds climbed 3.5 basis points (1bp=0.01 percentage point) from the previous day to 2.675%, while the yield on 30-year bonds rose 3.8 basis points to 3.269%. This increase in long-term yields is attributed to concerns that political uncertainty in the United States could intensify, as well as declining confidence in medium- and long-term economic policies. Since bond yields and prices move in opposite directions, rising yields indicate falling bond prices.

Marcin Aleksandrowicz Soltmasi, an economist at Economics, warned, "Now, the market's focus will be on government bond yields. However, this is a global phenomenon, and as the case of France shows, uncertainty in fiscal policy combined with high national debt is a dangerous mix."

The yen is also on a weakening trend. The yen-dollar exchange rate is trading at 148.5 yen as of today, up 0.76% from the previous session. An increase in the exchange rate means a decline in the value of the yen.

Chris Weston, head of research at Pepperstone Group, said, "Fewer and fewer investors are willing to hold the yen," adding, "The weakening of the yen is likely to spread in earnest across Asia."

However, some argue that the policy stances of the U.S. and Japanese central banks are more important factors for the exchange rate. Saktiandi Supaat, regional head of FX research strategy at Malayan Banking Global Markets, pointed out, "Prime Minister Ishiba's resignation could trigger short-term safe-haven demand for the yen and increase bond volatility. However, the sustained direction of the yen-dollar exchange rate depends more on the policy differences between the Federal Reserve and the Bank of Japan than on Japanese politics."

With the outlook for the Japanese stock market also becoming uncertain, there are predictions that investors may delay investments until the new prime minister is confirmed. The Nikkei 225, Japan's leading stock index, has continued to reach record highs alongside global stock markets since last month. The index opened higher at 43,451.07 today and is currently up over 1%.

In particular, Sanae Takaichi, former Minister for Economic Security, who is considered a hardline conservative politician and often referred to as the "female Abe," is seen as a positive factor for the Japanese stock market if elected, due to her preference for expansionary fiscal policy. Foreign media outlets such as Nikkei Asia are predicting high chances for both former Economic Security Minister Takaichi and Agriculture Minister Shinjiro Koizumi among the current candidates for the next prime minister. Other expected candidates include Chief Cabinet Secretary Yoshimasa Hayashi, former Secretary-General Toshimitsu Motegi, and former Economic Security Minister Takayuki Kobayashi.

Takamasa Ikeda, chief portfolio manager at GCI Asset Management, stated, "The market has already priced in his (Ishiba's) resignation. Now, the key point is that if Takaichi becomes the successor, her desire for increased government spending would be positive for the stock market."