What Does Abe's Resignation Mean for Markets?

Contents:

• MNI Markets Point of View
• Summary Table of Abe's Likely Successors
• Sell-side Analyst Views
• MNI Policy Coverage

Policy continuity not under threat, BoJ to remain supportive

Under Abe's tenure, Japan's economic recovery has been defined by his flagship 'Abenomics' policy, with the mix of monetary easing, government spending and structural reforms generally helping bolster the country's recovery from the Global Financial Crisis. While long-lasting sustainable inflation has remained elusive, the policy has succeeded in keeping the JPY weak, Japanese equity markets bid and government bond yields persistently low.

The (relatively) sanguine response to Abe's resignation so far is an indication that markets expect Abe's successor to retain the key tenets of his economic policies. Another supportive factor for policy continuity is that the most influential 'arrow' of Abenomics will not change: Kuroda's term at the Bank of Japan isn't due to end until April 2023, which should continue to lend support to the JPY remaining weaker for longer.

Market prices corroborate with this theory. JPY implied vols added a very small premium on the news this morning, but all front-end prices remain contained (particularly when compared to the levels seen during the Coronavirus crisis). While Japanese equities did pull lower on the news (the Nikkei 225 shed just over 300 points into the close) a resumption of JPY weakness should prove supportive of the index, with source reports already this morning suggesting there will be no change in BoJ policy as a result of Abe's departure.

This keeps the medium-term outlook for the JPY unchanged. The biggest risks to Japan remain exogenous, with the US Presidential election, global trade tensions and Coronavirus the key factors for Japanese asset prices going forward.

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