16th Nov 2020

What Does Japan’s New PM Mean for the Yen, JP225

Article Table of Contents:

In August 2020, the world saw the surprising resignation of Japan’s Prime Minister, Shinzo Abe. The 65-year-old was the longest serving PM of Japan, marking an end to his almost 9-year-long run. The resignation was due to the deteriorating health of Shinzo Abe. He had been battling ulcerative colitis, a type of inflammatory bowel disease. The condition began to significantly deteriorate at the end of July 2020, leading him to miss meetings at the peak of the Covid-19 pandemic. 

So, what does Japan’s new PM mean for the yen and JP 225? Well, to understand that, let’s first look at how the economy had been working under the former Prime Minister. 

The Legacy of Shinzo Abe

Abe had been working hard to revive the lacklustre economy of Japan since 2012. The policy package used for this purpose was dubbed “Abenomics.” Shinzo Abe drafted a 3-pronged approach to economic revival. He managed to get the Japanese central bank to inject a large volume of cash in the economy. This helped break a deflationary cycle, in which consumption was sapped by low asset prices and earnings. 

The target of 2% inflation could not be achieved by the Bank of Japan. But this policy at least managed to bring an end to the 20-year deflation period. Abe was also able to boost government spending levels. This helped provide fiscal stimulus, although it also increased the already high government debt. 

The Abe administration also improved free trade, signing various agreements, such as the EU-Japan Economic Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11).  These reforms propelled Japan into an era of continuous growth for 71 months. This was the second longest economic expansion period in Japan’s post World War II history. 

Japan, Post Abenomics

Abenomics was not entirely positive, with some of its policies yet to bear fruit. But the fact that there was a clear roadmap to get out of recession was a positive for the equity markets. It had also kept the yen in check. That is why, as soon as Abe announced his resignation, the Nikkei 225 fell 1.4%, while the JPY improved from 106.50 to 105.40 against the USD. 

The Start of “Suganomics”

After the election win by the Liberal Democratic Party, Yoshihide Suga was elected as the new Prime Minister of Japan. Although there is a change of leadership, many believe that “Suganomics” would not be much different from Abenomics. Yoshihide Suga was finance minister under Shinzo Abe and his right-hand man. This means that Suga and Abe have a similar framework for the Japanese economy.  

Additionally, the Bank of Japan is expected to continue with its monetary policies, at least in the short term. The aggressive easing by the BOJ has been one of the main reasons for the weakness of the yen. Suga also said, after taking office as Prime Minister, that exchange rate stability is of great importance to him. He said Japan would react to any changes made by the United States to its dollar policy. So, with the monetary policy remaining the same, the yen and the JP225 are expected to not experience any drastic changes. 
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