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JPY: Why Leadership Change Doesn't Matter

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In early Asian trading this morning, Japan's ruling party said they have picked Finance Minister Yoshiko Noda to be the country's new leader. Earlier this month, Prime Minister Kan announced his intention to step down after the initial shock of the earthquake, tsunami and nuclear crisis dissipated. Last week, with the passage of a debt and renewable energy bill as final conditions for his departure, speculation started to build on a potential successor. Noda was always a leading contender and his role as Finance Minister gives the country hope that he has the acumen to tackle Japan's long standing problem of burgeoning debt levels and little growth. Whether that is true remains to be seen as Kan had once held the same role. The job of Prime Minister has been a revolving door for the past 5 years. Since Koizumi stepped down in 2006, Japan has had 5 different Prime Ministers and Noda would be its 6 th . In any other G7 country, a resignation of a head of state would have triggered significant volatility in the currency because of political instability but in the case of Japan, the market has become immune to leadership changes. Although the Yen has traded lower against all of the major currencies, the sell-off is more likely a function of risk appetite than concern about the political change.

Yoshiko Noda has been in the public spotlight since June 2010 when he was appointed Minister of Finance by Prime Minister Kan. As the voice of fiscal hawkishness, he has championed higher taxes to fund the country's burgeoning deficit. In particular, Kan's Administration was looking to fund the growing Social Security gap by doubling the consumption tax and the fear is that except for the smiling face, nothing will change. Unfortunately even with a judo black belt, Noda may have a hard time slicing his way into the hearts of the Japanese because raising taxes without any pro-growth agendas will lead to a dead end. So far we have not heard of any particularly impressive proposals from Noda and word is that his allegiances with the bureaucracy means he could prove to be a one year wonder, just like his recent predecessors. The challenges that Noda faces includes a huge deficit, strong Yen, zero growth, nominal inflation and lingering nuclear / tsunami problems. The only thing that Noda has going for him is that he may do a better job of working with the opposition to achieve much needed fiscal reform. However right now Noda is still in the idealistic honeymoon period, talking about working together, and it remains to be seen whether the LDP is open to cooperation.

For foreign exchange traders, the biggest question is whether the Japanese will be more willing to intervene in its currency under Noda. Considering that he oversaw 3 rounds of intervention - 1 coordinated and 2 unilateral, there is a good chance that he is in support of more intervention. In fact, we would not be surprised if the Japanese intervened again shortly after Noda takes office, which would achieve the goal of providing some near term support for businesses and displaying some initial tenacity.

As for the reaction in the Yen in general, the following charts show that the Yen usually rallies on political resignations which suggests that perhaps the market is cheering the departure of an unpopular leader. After Koizumi resigned in 2006, the yen strengthened. The same was true after Fukuda (2008), Aso (2009) and Hatoyama (2010) resigned. Only Abe's resignation in 2007 led to Yen weakness. When Kan first announced his resignation on August 10 th , the Yen actually strengthened but with the currency pair trading at a record high, the gains were limited. Looking ahead, we expect the market to shrug off the political change in Japan with the trend of the Yen to be determined by risk appetite and any bouts of intervention.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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