During the spring and early summer there was hope that the political clouds in Japan would clear after the July Upper House election. That has not been the case. The poor performance of the LDP in that election has meant that changes in its leadership are still expected. This week brought the resignation of the LDP secretary-general Moriyama and there is speculation that other party executives could follow him out the door, Rabobank's FX analyst Jane Foley reports, Rabobank's FX analyst Jane Foley reports.

USD/JPY seen stuck until leadership clarity emerges

"Yesterday, Reuters reported that a close aide of Ishiba’s had indicated that the PM indeed intends to resign. For the market, uncertainty thus persists as to whether a change in leadership could potentially impact the BoJ’s rate hiking programme. In August USD/JPY traded mostly sideways. Until political question marks have been cleared, it is possible that USD/JPY could remain in the doldrums. Our forecast of a move to USD/JPY145.00 on a 3-month view assumes that the market retains its expectation of a BoJ rate hike around the turn of the year."

"While the seniors within the LDP looks set to change, the party itself is reportedly looking to bolster its position in the Upper House by potentially cooperating with independent members. As it stands, the LDP/Komeito coalition is three seats short of a majority. There are currently nine independents, a few of whom may be prepared to offer their support to the LDP in exchange for the bigger platform that would come from an allegiance with the LDP. If such action helps with the smooth passage of next year’s budget, it would be seen as broadly market supportive. That said, uncertainties related to a change in leadership in the LDP could have a bigger market impact particularly if it means that pressure is exerted on the BoJ. "

"For now BoJ Governor Ueda has stuck to his script. At Jackson Hole last month Ueda spoke of labour market shortages being inherently inflationary and, after his latest meeting with PM Ishiba, he repeated the view that the BoJ will raise rates if there are improvements in Japan’s growth and inflation backdrop in line with the central bank’s outlook. The September 19 BoJ policy meeting will be keenly watched for clues as to whether an October rate rise is being seriously considered. Whether or not these clues are provided, however, could depend on the prevailing degree of political uncertainty."