Sanae Takaichi won the leadership election of the Liberal Democratic Party (LDP) over the weekend. Given her affinity for 'Abenomics' - the ultra-expansionary fiscal and monetary policy of former Prime Minister Shinzo Abe - one should've expected a depreciation of the Japanese Yen (JPY) in response to her victory. And that is exactly what has happened. However, the future of the Japanese currency now heavily depends on how closely Takaichi will actually emulate Abenomics, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Takaichi's victory may not harm the yen

"Since the ruling coalition no longer holds an outright majority in both houses of parliament, it seems doubtful that the new government will pursue or be able to pursue similarly aggressive policies. During her campaign, Takaichi had already softened her stance on some issues, such as monetary policy, compared to about a year ago - likely aware that she cannot alienate the LDP's coalition partner or opposition parties, as their support will be crucial for advancing her political agenda."

"Furthermore, Abenomics was originally designed to pull Japan out of decades-long stagnation and deflation. Recently, however, the Bank of Japan (BoJ) has been focused on combating excessively high inflation. This puts fiscal and monetary policy at odds. On one hand, Takaichi is under pressure to alleviate the impact of rising living costs - possibly through tax cuts and increased government spending. On the other hand, such measures could fuel inflationary risks, likely forcing the BoJ to raise interest rates even further."

"All in all, Takaichi's victory may not harm the yen as much in the medium to long term as some currently fear."