"Shattering Stone" Shocks the World! Shigeru Ishiba to Become Japan's Prime Minister, Will the Great Yen Carry Trade Massacre Rise Again?

67-year-old former Japanese Defense Minister Shigeru Ishiba defeated Seiko Noda last Friday in the final round of the election to become the 28th President of the Liberal Democratic Party of Japan. He is expected to be nominated as the 102nd Prime Minister at the extraordinary session of the Diet scheduled for October 1. Due to Ishiba's support for the Bank of Japan's efforts to tighten monetary policy, the USD/JPY exchange rate plummeted from 146.5 to 142.15 last Friday, with the yen appreciating by nearly 3%. Will this lead to a repeat of the massacre seen in early August in arbitrage trading?

Shinzo Abe Vows to Lead Japan Out of Economic Woes

According to a report by BBC, ordinary Japanese families have been feeling the pressure of a weak yen, economic stagnation, and the fastest surge in food prices in nearly half a century since the outbreak of the COVID-19 pandemic.

Data from the Organization for Economic Cooperation and Development (OECD) shows that wages in Japan have remained almost unchanged for the past 30 years. The 30-year economic malaise combined with high inflation is tightening the pressure on Japanese households, prompting calls for government assistance. The yen's depreciation has made many imported goods expensive due to currency inflation, causing distress among Japanese residents.

Shinzo Abe has pledged to "completely eliminate" Japan's high inflation and has vowed to achieve "real wage growth." He emphasized the need to revitalize consumption in the world's fourth-largest economy to ensure that Japan can fully overcome its long-standing economic stagnation in a post-election press conference.

Shinzo Abe's Foreign Policy Takes Center Stage

Shinzo Abe is well-versed in party politics and security policy intricacies. He stated that given recent incursions by Russia and China into Japanese territory and missile tests by North Korea, Japan must enhance its security measures.

Shinzo Abe's diplomatic policy with Japan's closest ally, the United States, will also be a focal point as he has repeatedly called for a more balanced relationship with Washington. During his campaign, Shinzo Abe advocated for the establishment of an Asian version of a NATO security group to address threats from China and North Korea. A spokesperson for the White House National Security Council stated that Washington looks forward to "working with the next Prime Minister of Japan to further strengthen the U.S.-Japan alliance and advance our shared vision for a free and open Indo-Pacific region." A spokesperson from the Chinese Ministry of Foreign Affairs, when asked about Shinzo Abe's appointment, expressed hope for Japan to have a "objective and correct" perception of China.

According to a report by CNA, Shinzo Abe has a longstanding relationship with President Lai Ching-te, interacts actively with major political parties in Japan, and is highly trusted by key members across party lines in Japan. It is expected that under Shinzo Abe's leadership, the Taiwan-Japan relationship will continue to develop towards a closer direction.

Yen Rises, Arbitrage Unwinding Begins Again?

The Bank of Japan announced a 15 basis point rate hike on 7/31, raising the benchmark interest rate to its highest level since 2008, leading to forced unwinding of carry trades, global stock market declines, and a continuous appreciation of the yen. However, Bank of Japan Governor Haruhiko Kuroda remains firm in stating that if the Bank of Japan is convinced that economic and price developments are in line with expectations, the basic stance on adjusting the degree of monetary easing will not change.

Will the era of a cheap yen officially end with the hawkish rate hike to 0.25% by the Bank of Japan?

Due to Shinzo Abe's support for the Bank of Japan's efforts to tighten monetary policy, the USD/JPY exchange rate plummeted from 146.5 to 142.15 last Friday, with the yen appreciating by nearly 3%. If it falls below the previous low of 139.57, it may trigger a new round of forced unwinding of arbitrage trades.