Yen gains capped by politics – ING

Japanese markets are showing signs of strength, but political uncertainty is capping yen gains. Despite bullish signals from equities and rates, USD/JPY remains stuck near 147, ING's FX analyst Chris Turner notes.

Markets bullish, USD/JPY flat

"Looking at Japanese markets, we can see Japanese equities up 3%, 10-year JGB yields +6bp and the 1m JPY OIS rate priced in one year's time +8bp. So far, so yen bullish. Yet USD/JPY is flat around 147 and that probably has to do with politics."

"Having got the trade deal over the line, it looks like Prime Minister Shigeru Ishiba is ready to take responsibility for the poor Upper House election result and resign. That ushers in a period of political uncertainty and questions how any new PM will work with opposition parties – more fiscal expansion? – and what pressure is brought to bear on the Bank of Japan."

"With so much uncertainty and low volatility still favouring carry, we do not see a strong rationale for the yen to trade a lot stronger from here."