The Japanese Yen (JPY) has recovered somewhat in recent days and is currently trading around 150 to the US dollar again. However, I must say that the reason for this is not quite what I had expected. It still seems correct that market hopes for a swift return to a form of Abenomics following the election of Takaichi as the new LDP leader were premature. However, this is not because the LDP and Komeito coalition held together as I had expected. Quite the contrary. It has since been dissolved. Rather, it is still very unclear who will be elected prime minister next week and with the help of which coalition, Commerzbank's FX analyst Volkmar Baur notes.

More stability in the Japanese exchange rate

"While the LDP, led by Takaichi, continues to hold talks with other smaller parties, it has also become clear that there is a possibility that Takaichi will not become prime minister after all. This was something that was considered a foregone conclusion when she was elected LDP chairwoman in early October."

"This week, three opposition parties met to explore the possibility of a coalition. This would be a first in Japanese politics, and none of these parties has had any experience in government in the last 13 years. It therefore seems to be becoming clear that, whatever form a possible coalition takes, whoever is elected prime minister when parliament convenes on October 21 is likely to be in a fragile position."

"I would therefore not expect bold reforms or a significant departure from what has happened in recent years. The parties largely agree that private households should be relieved and inflation brought under control. However, this will likely result in minor measures such as the suspension of gasoline taxes. At the same time, it should be clear to everyone that further pronounced JPY weakness is only likely to exacerbate the situation. The turmoil in Japan's political landscape therefore suggests that we can expect somewhat more stability in the Japanese exchange rate."