Will Japan Continue Monetary Normalization? – Commerzbank

Japan’s Liberal Democratic Party has elected Shigeru Ishiba as its new leader, and he may be the next prime minister. It was a bit of a surprise that Ishiba was chosen – but a very positive one for the Japanese yen (JPY), notes Ulrich Leuchtmann, head of FX and Commodity Research at Commerzbank.

The attempt to normalize monetary policy ends in failure

“Observers have mentioned Sanae Takaichi, among others, as a promising candidate to succeed incumbent Prime Minister Fumio Kishida. However, Takaichi is considered an outspoken opponent of the BoJ’s restrictive policy. Had she been appointed as the new prime minister, there would have been a possible return to ‘Abenomics’, including an ultra-expansive monetary policy.”

“This option does not agree with Friday’s decision. Although Ishiba has so far made his name primarily on defense and foreign policy issues, he has signaled clearly enough that he is at least not opposed to the BoJ’s tight monetary policy. A new edition of Abenomics will certainly not happen to him. So it makes sense that the news was greeted by the FX market with very significant JPY strength.”

“Current BoJ policy is likely to fail. It will not lead to lasting inflation, but to a relapse into the old zero inflation, and therefore the attempt to normalize monetary policy will end in failure. The remaining inflation does not result from the prices of labor-intensive services, but mainly from the prices of goods. It is therefore more a result of the yen’s previous weakness than a sign of a self-sustaining inflationary process. The recovery of the JPY in recent months will likely see this effect dissipate soon.”