The Japanese Prime Minister Shinzo Abe announced last week that he will step down from the Prime Minister role, and the JPY started to move. While his term ended in one year, anyways, it is the end of an era as Abe is viewed as having influenced monetary policy too.
The notion of “Abenomics” was introduced to financial markets as a result of Abe’s work. Since 2013, Abe has driven Japanese policy and had a major role in setting monetary policy too. The announcement came as a surprise for the JPY pairs, and last Friday the JPY appreciated across the F.X. dashboard.
The reason why the JPY strengthened was that it was not clear who was going to follow him. In other words: what comes next?
Abenomics and the JPY’s Performance
The period between 2012 and 2015 is known as the period where the JPY dominated the volatility on the F.X. dashboard. It is then when the USDJPY traveled from 80 to 120, as a result of desperate efforts to drive inflation higher.
Japan struggled with inflation for decades, barely keeping it positive and far away from its 2% target. As such, the fiscal and monetary policy in the country were one of the most innovative at the time. For instance, when the Bank of Japan embarked on quantitative easing, it did so with a program three-times larger than the one in the United States. When considering that it was applied on a much smaller economy, one sees the true impact of the decision.
Abe is the product of its party, LPD, and the markets were taken by surprise last Friday because there was no successor in sight. In such a case, will Abe measures be continued? The problem of continuity, therefore, was the one driving the JPY higher – or, more precisely, uncertainty.
That uncertainty vanished away just as easy as it came. Over the weekend, Yoshihide Suga, the Chief Cabinet Secretary of the party, received full support from the party to replace Abe. Hence, the JPY pairs made a U-turn on Monday, and the EURJPY even made a new high when compared with the Friday’s high before the decline.
It shows, once again, how fragile the FX market is. It reacts on any news, triggers stops in both directions, on little or nothing. This is why it is important to always have a stop-loss order for any given trade.