Japan’s new prime minister, Shigeru Ishiba, is poised to reshape the country’s economic future, with markets bracing for what could be a dramatic shift in policy.
As the former defense minister steps into the role of prime minister, markets are already reacting to the potential changes that his leadership could bring. The liberal shift in Japan’s governance signals a possible recalibration of the monetary policy approach that could impact both domestic and global markets.
Ishiba has been vocal about his intent to steer a step away from the ultra-loose monetary stance that his predecessors, most notably under “Abenomics,” had championed. While the Japanese PM still calls for monetary policy to be “accomodative”, this shift was evidenced in his remarks supporting a gradual increase in interest rates and his critique of the Bank of Japan’s (BOJ) long-standing negative interest rate policy.
By signalling a move towards stronger monetary controls, Ishiba has positioned himself as a leader more inclined toward stabilising the yen rather than relying on measures like quantitative easing.
In the aftermath of his election, we observed an immediate reaction in the markets, with the USD/JPY pair dropping by over 400 pips. Traders appear to be adjusting to expectations that Ishiba’s policies could strengthen the yen over time.
The drop reflects market sentiment that tighter monetary policies would lift the currency. A stronger yen may indeed benefit Japan by reducing import costs, yet it could also bring challenges to key industries like automobiles and electronics, where export competitiveness is crucial.
Historically, Japan’s economy has relied heavily on a weaker yen to boost exports; thus, if Ishiba proceeds too aggressively with tightening policies, the negative impact on corporate profits could ripple across its broader economy.
While the Japanese yen has shown some resilience after the election, we see a cautious path ahead. Any rapid appreciation could risk destabilising Japan’s fragile post-pandemic recovery. Wages remain stagnant, and inflation is still low, which makes this an economic tightrope for Ishiba.
The BOJ will likely play a key role in balancing these factors as we move into Q4, with global traders monitoring every policy shift closely.
For one, Ishiba’s foreign policy platform also poses interesting implications for Japan’s strategic role in the Asia-Pacific region. His advocacy for stronger ties with the U.S., particularly in defense, alongside his proposal for a regional “Asian NATO,” suggests a heightened focus on national security.
While this could bolster Japan’s military and diplomatic clout, it risks straining relations with major economic partners such as China and Russia. The ripple effect of such diplomatic tension could impact cross-border investments and trade, especially if regional nations feel pressured to align with one side or the other.
Given these potential shifts, we believe we are looking at a period of volatility in Japan’s financial markets as both traders and corporates adjust to the changing economic climate.
The USD/JPY pair has been under particular scrutiny since Shigeru Ishiba’s election as Japan’s new prime minister. As mentioned earlier, the pair has dropped by over 400 pips following the election announcement, reflecting the market’s anticipation of Ishiba’s potential policy shifts.
Currently, USD/JPY appears to be in a period of consolidation after the sharp decline. Traders will likely focus on the 144.30 level for any signs of bearish price action. The question remains whether the pair will push lower from this zone or whether it stabilises as traders wait for more clarity on Japan’s future monetary policy stance.
A consolidation at this stage suggests that the market is still digesting Ishiba’s election and its broader implications. We might see some hesitation before traders make any moves until more concrete policy direction is provided by the new government.
Meanwhile, the broader USDX is showing mixed signals, having made a new weekly low on Friday. Traders are eyeing this as a potential buying opportunity. The 99.00 level is seen as a critical support zone. If the dollar index dips to this point, it could trigger a bullish reversal, especially if market sentiment turns in favour of the USD amid any perceived risks stemming from Japan’s new foreign policy initiatives.
In terms of the EUR/USD, there is a strong chance the pair could drop further from its current area. There’s a possibility that it may make one final push higher before retreating. Traders looking at bullish price action around the 1.1100 or 1.1040 zones may find opportunities here, but the overall sentiment appears to lean towards a decline in the near term.
GBP/USD is showing a similar pattern, with the potential for the pair to either come down from its current area or make one more push higher before reversing. If it does rise, the 1.3500 level becomes a key resistance point, and bearish price action around this zone will likely set the tone for the following week. However, if the pair declines sooner, the 1.3300 level could provide a solid area for a bullish reaction, offering some short-term opportunities for traders seeking to capitalise on volatility.
Lastly, gold has continued its downward movement after testing resistance at 2670. A potential consolidation is expected here, and bullish price action around the 2590 area could set the stage for a rebound. Even if gold makes a new high without testing this support, it’s likely we’ll see some consolidation before any further upward movement.
As we head into the first week of October, there are several key economic data points to watch closely, each with the potential to drive market movements. The week kicks off with Monday’s release of Germany’s Preliminary CPI data, which is forecasted to come in at 0.1% following a previous reading of -0.1%. This subtle shift in inflation expectations could influence the EUR/USD pair, where we might see a brief dip before any upward momentum takes hold later in the week.
Moving into Tuesday, the focus will shift to several high-impact U.S. reports. The ISM Manufacturing PMI is expected at 47.6, slightly above the previous reading of 47.2, suggesting that the sector remains in contraction but is showing marginal improvement.
However, the real interest lies in the JOLTS Jobs Opening report, with 7.64 million jobs forecasted, just slightly below the previous figure of 7.67 million. If this data comes in weaker than expected, it could fuel speculation that the U.S. job market is softening, adding further pressure to the dollar. Early in the week, we expect to see traders positioning themselves for potential dollar gains unless the USDX dips to 99.00, which would act as a key level of support.
On Wednesday, the ADP Non-Farm Employment Change takes centre stage, with a forecast of 124K jobs added versus the previous 99K. This represents a sharp uptick, and traders will be watching closely to see whether the actual data meets expectations.
A stronger-than-expected ADP figure could reinforce the view that the U.S. labour market remains resilient, even in the face of high interest rates. Should the ADP number surprise to the downside, however, we could see the dollar weaken, as markets may interpret this as a precursor to a slowdown in the broader economy. This will be a key moment for USD pairs, particularly as the Non-Farm Employment Change approaches on Friday.
Thursday brings the ISM Services PMI, forecasted at 51.6, marginally higher than last month’s reading of 51.5. Any data supporting a strong U.S. services sector will likely reinforce dollar strength, keeping the USDX on its upward trajectory, barring any surprises in the jobs data. With services being a large portion of the U.S. economy, the ISM figure will be closely monitored for signs of economic resilience or potential weakness.
The end of the week is when the most closely watched reports are released: Friday’s Non-Farm Employment Change and the Unemployment Rate. The Non-Farm Payroll (NFP) data is forecasted at 144K, compared to 142K in the previous report, reflecting a marginal increase in job creation. The unemployment rate is expected to hold steady at 4.2%.
These figures will provide insight into the health of the U.S. labour market, especially as traders and analysts alike attempt to gauge whether the Federal Reserve will maintain its current monetary policy path or make adjustments in response to new data.
A stronger-than-expected NFP report, combined with a stable unemployment rate, could drive the dollar higher, especially if paired with the earlier ADP data confirming robust job growth. Conversely, a weaker NFP could lead to dollar softness, as it might suggest that the Fed will need to reconsider its hawkish stance.
The 144K forecasted jobs growth is moderate, but anything below that could spark concerns about a potential slowdown in the U.S. economy. Markets will likely respond with heightened volatility around Friday’s release, making it an important day for traders in dollar-denominated assets.
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