The Japanese Yen (JPY) came under pressure in yesterday's trading after it became clear that coalition talks in Japan are proving more difficult than expected. At present, it even looks as though the election of Sanae Takaichi as the new prime minister may have to be postponed. The original plan was for the new leader of the ruling LDP party to be elected prime minister at a session of the lower house on October 15. However, the small coalition partner in the government - the Komeito party - has now indicated that it may not be willing to support Takaichi as prime minister, Commerzbank's FX analyst Volkmar Baur notes.

JPY pressured as Japan’s coalition talks stall

"In addition to the very conservative political views of the prime minister-designate, which are not fully supported by Komeito, a bribery scandal in recent years appears to be particularly threatening the coalition. In particular, the reappointment of Koichi Hagiuda to the party leadership caused irritation, as he was one of the main figures responsible for the so-called “slush fund scandal.” In addition, Komeito has long been pushing for stricter rules on party financing - an effort that Takaichi is unwilling to support."

"This could lead to the LDP looking for another coalition partner. One possibility would be the DPP (Democratic Party for the People). During the election campaign, the DPP had advocated a more lax fiscal and monetary policy, which is why the Japanese yen weakened slightly in the wake of this news. Later in the day, however, Takaichi made statements to the effect that they would not explicitly attempt to weaken the JPY excessively. Although this wording leaves plenty of room for speculation – how much weakness would be 'excessive'? – in the current somewhat nervous market environment, it was enough to cause a temporary appreciation of the yen."

"We still assume that the coalition between the LDP and Komeito will hold – after all, it has been in place for 26 years and even includes the nomination of some joint candidates. Therefore, only minor concessions are likely to be made to opposition parties such as the DPP in order not to jeopardize the minority government. Consequently, we do not expect to see any kind of Abenomics 2.0. The government is likely to pursue economic and monetary policies that are appropriate to the current circumstances, which in our opinion suggests a stable development of the JPY against the US dollar."