The yen weakened sharply on Monday after Japanese Prime Minister Shigeru Ishiba announced his resignation, heightening political uncertainty in the world’s fourth-largest economy. At the same time, the dollar steadied as investors digested a weak U.S. jobs report that strengthened expectations of a Federal Reserve rate cut later this month.
In Asia trade, the yen fell 0.6% against the dollar to 148.25, while sliding to its lowest levels in more than a year against the euro and sterling at 173.91 and 200.33, respectively. Investors are watching for Ishiba’s successor, with attention on potential candidates such as Liberal Democratic Party (LDP) veteran Sanae Takaichi, who has criticised the Bank of Japan’s recent interest rate hikes.
“The probability of an additional rate hike in September was never seen as high to begin with, and September is likely to be a wait-and-see,” said Hirofumi Suzuki, chief currency strategist at SMBC. “From October onward, however, outcomes will in part depend on the next prime minister, so the situation should remain live.”
Concerns over political instability weighed on Japanese government bonds, pushing the 30-year yield to a record high. “With the LDP lacking a clear majority, investors will be cautious until a successor is confirmed, keeping volatility elevated across yen, bonds and equities,” said Charu Chanana, chief investment strategist at Saxo. “Near-term, that argues for a softer yen, higher JGB term-premium, and two-way equities until the successor profile is clear.”
Kyodo reported on Monday that former Japanese foreign minister Toshimitsu Motegi will run for LDP leadership.
The dollar, meanwhile, recovered some ground after Friday’s sharp selloff triggered by data showing U.S. nonfarm payrolls weakened significantly in August, with unemployment rising to a near four-year high of 4.3%.
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“Given the more elevated downside risks to the employment side of the mandate, we think a rate cut at the September meeting is all but assured,” Barclays economists said in a note. “We continue to expect a 25bp cut at that meeting. However, we change our Fed call by adding another 25bp cut in October, while leaving our December cut unchanged. In all, we now think the FOMC will proceed with three 25bp cuts this year, easing the policy stance in the face of the slowing labor market.”
The dollar index was last at 97.87 after dropping more than 0.5% on Friday. Sterling slipped 0.11% to $1.3492, while the euro eased 0.11% to $1.1709. The Australian dollar inched up 0.05% to $0.6558, while the New Zealand dollar dipped 0.03% to $0.5891.
