The search for Japan's new Prime Minister is entering a critical stage. This coming Saturday, the ruling Liberal Democratic Party (LDP) will hold its leadership election. The winner of this election is expected to be appointed Prime Minister by the Parliament - unless the opposition parties nominate their own candidate, which is considered unlikely. Two frontrunners for the position have recently emerged: former Minister of Economic Security Sanae Takaichi and current Minister of Agriculture Shinjiro Koizumi, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Yen depreciation in the short term is likely

"Takaichi was already a candidate in last year’s leadership race. At the time, concerns were raised that she might hinder a normalization of monetary policy, as she publicly opposed interest rate hikes. In recent statements, however, Takaichi has adopted a more moderate tone, emphasizing that monetary policy decisions are determined by the Bank of Japan."

"Nevertheless, she warned about the potential economic risks of rapidly increasing interest rates. Takaichi is also considered a 'fiscal dove,' meaning she supports expansionary fiscal policies. If she wins the election, speculation about a revival of "Abenomics" - the highly accommodative fiscal and monetary policies introduced under former Prime Minister Shinzo Abe - could resurface."

"For context, shortly after Abe's inauguration in late 2012, the Japanese yen lost 30% of its value against the US dollar within a year. While it remains unclear whether Takaichi would pursue similarly aggressive policies, a yen depreciation at least in the short term is likely if she becomes Prime Minister."