BREAKING NEWS: Shinzo Abe Resigns - What Does This Mean For Markets?

Okay, hi everyone, just wanted to jump on because there's been some breaking news. As you can see to the side of me here, Shinzo Abe, the Prime Minister of Japan, has just resigned for health reasons. This isn't the first time, actually he did resign back in 2007 for actually the same reason. He suffered for many years for, or from, ulcerative colitis, which is an inflammatory bowel disease. But his condition is said to have worsened recently. I think he's been back and forth in hospital over the course of the last week. He does though resign now as Japan's longest-serving prime minister. His current period in office began in 2012, and again, he was previously there, but he had to step down back in 2007. It was when he previously had a flare-up of this case. At this point in time, I can't really see him coming back again, but we wish him, wish him and his family well, of course, and hope he makes a speedy recovery. But the big question here for traders is really, what does this mean? And we've seen the Japanese yen appreciate quite considerably so far this morning, so I wanted to just quickly cover off a few basics about Abenomics, which is the main thing and reason why the market is reacting and the yen might perhaps, if you're not used to markets or Japanese policy, be slightly counterintuitive because the currency is actually strengthening from his resignation, and I'll explain why. First of all, Abe, a bit of background about him as a character. He's got a bit of a reputation as a staunch conservative and a nationalist and for stimulating growth with aggressive economic policy, and that economic policy is called Abenomics. Abe and his cabinet, as a timeline here, they will continue to run the government until a new premier is elected, but could not adapt or adopt any new policies. The winner of the party election would then hold a post until the end of Abe's LDP term, which is in September of 2021. He was asked who's going to replace him this morning in a press conference, and he said it's not his choice. Going forward. All right, well, what is Abenomics is the main thing. Abenomics is a set of policies that came up when he introduced them in coming into power in 2012. And basically it follows what we call three arrows, the old-age kind of Japanese thinking that three is stronger than one in terms of unified policy approach, is kind of the, the idea here. And the main one of this, and the one that which markets are particularly sensitive to, is the first arrow. And the first arrow is Monetary policy. Monetary policy. Japan's hyper-easy monetary policy in the form of negative short-term interest rates was put in place to make it cheaper for consumers and companies to borrow money and spend. So one of the main things here was when this Abenomics was first adopted in 2012, we did actually see some early optimism in markets contributing to a doubling of Japanese stocks in the equity market and the slump in the currency boosted by tourism. Um, the actual goal here ultimately was to spur inflation, which has always remained particularly elusive in Japan despite the amount of monetary easing which they've conducted. Proponents of Abenomics see then that Japan's mammoth purchases of government debt is really the only way to shake off the threat of deflation and avoid more stagnation in their economy. Now, a couple of things have happened since then. Obviously, the Bank of Japan, as we know, moved rates into negative territory as of early 2016 in order to further encourage spending, and that's now been pushed back the projected time frame for reaching its 2% inflation goal no fewer than, I think, 6 times or so. You know, we talk about the Fed and their policy tweet we had yesterday. Of course, now we're averaging that out, and this is a real reason why in Japan, for example, they continue to miss that target. Other Abenomic policies include cutting corporation taxes, urging Japan's state pension fund to buy riskier assets as well. So the other two arrows here, other than monetary policy, is fiscal stimulus— pumping money into the economy, which means the government's spending more money on things like infrastructure, financial incentives to companies like tax breaks, as I just mentioned— and then structural reforms. Structural reforms would be corporate reform, adding more women into the workplace, labor liberalization, allowing migrants into the workforce, all these other things to help accelerate economic growth. Now if we actually look at the market then, how has it reacted so far? If I just quickly switch over my screens, this has been the initial reaction. I'm looking here at dollar-yen in the futures market, and you can see as soon as those news reports started to come out, the timing of this has been basically an initial news report overnight speculating, and then he later came out and now has confirmed in the press conference officially that he is resigning due to ill health. So the yen has been strengthening. We got close up to around the 107 handle initially. You can see then in terms of this recent price movement that we have had in USDJPY, largely driven by obviously weakness, if you like, initially in the dollar. But then the dollar came back over overnight, some of this idea about with the yields curve steepening, as I discussed in the briefing this morning. We moved up. However, now the yen's kind of taken over on the back of this news, and, and all of this is basically on the back of the the fact that it's going to be an unwinding perhaps of Abenomics and this whole push and quest for hyper easy monetary policy going forward. And so just resulting as well in some repatriation flows back into the yen. And so yeah, we're right back down. We've lost already about 100 pips plus at the moment, and we're down at the S1 on the daily pivots. In a longer time frame, looking on a weekly where we briefly flirted with back on around this time last month on the 27th. It's quite an interesting technical point if the yen does continue to strengthen against the dollar, and that could well possibly be the case because generally the dollar is, is somewhat in a weakened state fundamentally now given the low rate mentality that's being adopted by average inflation targeting. So if the yen does start to strengthen, um, that would be a key level to look out for. 104.14 here, looking on the weekly candlesticks here at, at DOLLYJPY. You can see the market has respected this multiple times over the course of several years. We then had the actual pandemic low point when we were in right in the midst of that volatility period. That was when equities were really selling off hard globally, so people flocking to traditional safe havens like the yen. That was when we hit that original low at 101.14. I have actually seen banks like JP Morgan being out in recent times speculating that if Abe were to resign and then the, let's say, the disintegration of Abenomics, then potentially we could see a ¥100 price point. No specific timeframe there, but that's a long way off, but not massively unrealistic. We were trading back around those levels only in around 2016. 2016 type era. So yeah, a couple of long-term considerations there. In terms of his replacement, I'm going to put a link into this video if you want to have a read a bit more specifically about who those replacements are, what is their background, what is their political leaning, and therefore what is the potential for the longevity or not of Abenomics. That's going to be really key, is who is his replacement. And if I jump to This article here, it's on Reuters. Um, Tara Aso, the, the finance minister, also doubles up as a deputy prime minister. There's a few others as well— the hawkish former defense minister, the foreign minister. I'll let you consume this in your own time. We're probably not going to have anything immediate. There's going to be lots of jostling, of course, for political advantage here, I'm sure, even within his own party. But this would definitely be worth reading in advance of that to really understand a bit more how the yen might react. Yeah, then there's been a couple of good tweets as well that I've been resharing. My Twitter handle is here, so feel free to check that out. But look, short, sharp. I hope that was useful, gets you up to speed with things just generally. And yeah, Shinzo Abe has resigned. Take care.