USD/JPY: what lies behind the JPY's recent decline?

Fumio Kishida won the race to become Japan's next Prime Minister, is this the reason for the yen's fall?

One of the dominant themes in the currency market last month was the continued weakness of the JPY. This decline is particularly visible in the 2nd half of the month, when the race for the new Prime Minister intensified.

The sharp decline in the Japanese yen began when former Prime Minister Suga announced that he would not run in the new election. The markets took this announcement as a positive sign, as the other candidates promised to implement more stimulus measures to help the economy recover from the virus crisis. As a result, even the Nikkei 225 index broke a months-long consolidation.

The Japanese yen lost three big numbers (i.e. three hundred pips) against the US dollar in the last week alone. The USD/JPY went from 110 to 112, with the last leg up coming on the news that Fumio Kishida had won the race to become Japan's Prime Minister.

Japanese yen at 18-month low against the US dollar
Kishida, a former foreign minister, supports bold monetary and fiscal policies, building on the legacy of Abe Shinzo (i.e. the prime minister who led Japan before Suga). Abe has gone down in history as the man who supported the Bank of Japan's massive quantitative easing programmes that led to a sharp decline in the Japanese yen - the USD/JPY rose from under 80 to over 120 in response.

The recent rally in USD/JPY resembles the start of the massive rally a few years ago. If Kishida turns out to be the new Abe, the pressure on the yen should continue.