The EURJPY exchange rate will be in focus after the Japanese election provide the country’s first ever female Prime Minister.
EURJPY – Daily Chart
The EUR/JPY has risen from support after recent yen strength gave way to selling. The arrival of a big spending Prime Minister could see the euro gain from here.
Investors are reacting to the news of the “shock” appointment and waiting to place their first “Takaichi trades”. The new PM is pro-stimulus, nationalist and could shake up the country’s path under the ruling Liberal Democratic Party.
Sanae Takaichi’s victory is expected to usher in an era of increased government spending and a more hawkish foreign policy, amid a backdrop of escalating geopolitical tensions. Takaichi will inherit a stock market at all-time highs, but also an inflation rate that is above the central bank’s 2% target after years of deflation.
Takaichi will also have to deal with Trump’s tariffs after her campaign slogan, “Japan is back!” and said she would not renegotiate the tariff deal. Japanese trade with the United States is minimal and is unlikely to have a significant impact on the economy.
However, her leadership is expected to bring a long list of uncertainties, according to analysts. A return to the “Abenomics” era of lavish government spending could exacerbate yen weakness, bolster the stock market, and lead to rising bond yields. That could mean a volatile week ahead for the Yen and the Nikkei.
“The Takaichi trade is basically positive for stocks, and probably some volatility in JGBs and currency because of the risk of a lot of new fiscal stimulus,” the FT said, citing a Japanese broker.
“I don’t think anyone thinks Takaichi is going to give Japan a ‘Liz Truss’ moment, but things are going to feel quite unsettled for a bit,” they added. Truss was famous for causing a sharp spike in bond yields in the UK, leading to the end of the Prime Ministerial position after just over a month in charge.
The EUR/JPY has important speeches and data ahead on Monday, including European retail sales at 1:00 pm HKT. Consumers boosted retail sales by 2.2% in August, and traders will look for further positive support. There will be speeches from ECB policymakers, including Luis De Guindos and Chief Economist Philip Lane, at 11:15 am and 12:00 pm HKT. That could mean a big volume day for the currency pair.