28.08.202010:25 Forex Analysis & Reviews: USD/JPY. Abe leaves, Kuroda remains: Is trusting the downward impulse worth it?

The yen is showing increased volatility today – including when paired with the dollar. The USD/JPY pair initially jumped almost a hundred points during the Asian session on Friday, that was, to the 107th figure. However, as soon as the European session started, it further declined, almost to the base of the 106th price level. This price trend is not because of the dollar's behavior (the dollar index has been steadily declining over the past half a day), but rather to the yen's behavior. To be more specific, the political events in Japan overshadowed J. Powell's speech yesterday, at least in the context of the dollar/yen pair. Over the next few days, price fluctuations of the indicated pair are expected to be determined by political factors. The reason for this is quite impressive:

So, it was reported a few hours ago that the Prime Minister of Japan is going to retire early for health reasons. Several Japanese publications reported this at once, citing their sources. A little later, the Liberal Democratic Party of Japan officially confirmed the resignation of its leader.

According to journalists, 65-year-old Abe visited the hospital several times this week, and after the last visit to the doctor, he decided to leave his post. It was reported that Shinzo Abe has had ulcerative colitis (chronic inflammation of the lining of the colon) for a long time. The worsening disease was the reason for his resignation in 2007. However, it stabilized so he was elected as the prime minister again in 2012. As journalists note, his term in office exceeded 2,799 days, which is the longest (post-war) period among Japanese prime ministers.

As mentioned above, the yen initially collapsed throughout the market, as soon as it was reported that the Prime Minister will likely resign. This is a natural and rather "reflex" reaction of traders who reacted to abrupt and, most importantly, unexpected political changes.

But as soon as official comments began to appear, the situation suddenly changed: the yen began to gain impulse, and on the contrary, the Nikkei 225 index sank, which dropped by 2.5%. According to representatives of the party leadership, the next Prime Minister will be determined through a vote in the Liberal Democratic Party. They also stressed the importance of Abe's successor "continuing his wise policy." Early elections for the party's Chairman, who will almost automatically become the country's head of government, will be held in September, but there is no exact date for the vote yet. The approval of a new candidate requires the consent of the deputies – but there should not be any problems. According to the results of the last parliamentary elections, the liberal democratic party and its allies control the majority in both chambers of the national Parliament. This will allow the new head of government to be approved without any delay, despite possible attacks from the opposition forces. All this suggests that the change of the country's leadership will be relatively smooth, and political battles will unfold only within the ruling party. This fact is unlikely to affect the positions of the Japanese currency.

However, the yen is quite sensitive right now to the news flow regarding personnel changes. At first, it weakened impulsively, but now, it is growing impulsively. It is noteworthy that during periods of such political changes, it is extremely risky to open any trading positions (both longs and shorts). If we look at more distant prospects, then in my opinion, the strengthening of the yen will be temporary.

In theory, the option of Abe's possible resignation has been considered for a long time. But of course, no one expected that it would take place so suddenly, without any previous events, for example, hospitalization of the prime minister. Nevertheless, currency strategists admitted such scenario may occur, especially after the events of 2007, when he left his post due to the same reason.

Moreover, many experts (in particular, JPMorgan) predicted the market's reaction to Abe's resignation, forecasting the yen's growth. They also warned their clients against hasty decisions regarding purchases of Japanese currency. The fact is that the policy of Shinzo Abe, which supports the growth of the stock market and keeps the national currency from excessive growth, is likely to continue. Actually, representatives of the ruling party said this today, only in a more generalized form. It is also worth recalling that the term of office of the head of the Bank of Japan, Haruhiko Kuroda, is until April 2023 only. Therefore, it is extremely unlikely that the Japanese regulator will change its approach to monetary policy – at least in the context of the coming months.

Thus, the sharp decline in the USD/JPY pair is rather emotional, which is worsened by the general weakening of the US currency. Therefore, it is not suggested to open trade deals on the pair at the moment, especially before the weekend.