Prime ministerial election stalled, yen at an impasse

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I. Deadlock in the Election of Japan's Prime Minister

Since last Friday, the election for Japan's new Prime Minister has entered a chaotic free-for-all: the Komeito Party defected, the Liberal Democratic Party is frantically seeking new allies; Constitutional Democratic Party’s Yoshihiko Noda nominated Yuichiro Tamaki from the Democratic Party for the People as a candidate, trying to join forces with the Japan Innovation Party to overthrow LDP rule. However, yesterday, the Japan Innovation Party announced it had reached many agreements with the LDP...

There is intrigue among parties, and the parliamentary vote is being postponed repeatedly, from the 15th to the 20th, 21st, or even longer. The more difficult it is to elect a Prime Minister, the more the market cuts “Sanae” pricing for the yen, leading to sustained weakness in the USDJPY over the past two days, dropping from 152.5 down to 150.5.

II. Why is it so difficult to elect a Prime Minister this time?

1. Komeito Party’s dissatisfaction with Sanae Takaichi

The collapse of the alliance was not accidental, but rather the inevitable result of growing policy differences after Sanae Takaichi became party president. The Komeito Party raised three main demands: a thorough investigation of the “dark money” scandal, a clear stance on historical issues, and opposition to exclusionary policies. At the final high-level meeting on the 10th, Takaichi gave a perfunctory attitude towards political funding reform, stating, “Even as president I cannot decide, it needs to be studied within the party,” and insisted on appointing a lawmaker involved in the “dark money” scandal to a senior party post, angering the Komeito Party.

Moreover, Takaichi represents the original “Abe faction” and “Aso faction” conservative forces within the LDP; her radical conservative and right-leaning policies are in serious conflict with Komeito’s “moderate conservatism” and pacifist principles. To preserve their constituents, Komeito chose to “split for self-preservation.”

2. The three major opposition parties are still jockeying for position

After Komeito withdrew from the ruling coalition, if the “CDP + Innovation + DPP” opposition parties really united, they could defeat the LDP in the House of Representatives. However, they have different policy positions and it is not easy to reach a consensus. Even if they succeed in toppling the LDP, the DPP’s power within the alliance is the weakest, which means Tamaki would face significant constraints from the other two parties, making policy implementation very difficult.

III. Forecast of Follow-up Election Results and Yen Outlook

Based on current information, there are three possible scenarios for the upcoming Japanese prime minister election:

Scenario ①: The LDP pulls in new allies, Sanae Takaichi comes to power, in which case the yen will remain weak for a long time;

Scenario ②: The LDP becomes a “minority ruling party,” Sanae Takaichi comes to power, but will be unable to independently push major legislation and budgets through the Diet; the opposition may unite to block key policies. In this scenario, the yen will also be weak, but the weakness will be less severe than in Scenario ①;

Scenario ③: The Constitutional Democratic Party, Innovation Party, and Democratic Party for the People form an alliance, Yuichiro Tamaki comes to power, the yen will quickly strengthen, and USDJPY may quickly return to around 148, the level at the end of September.

Finally, Trump will visit Japan before attending APEC in South Korea (around the 27th-28th of this month), so the process of electing Japan's new Prime Minister needs to speed up…

Source: Morning FX Market, original title: "Deadlock in Prime Minister Election, Yen at a Crossroads"

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