Yen Bounces Back as Veteran Lawmaker Ishiba Wins Prime Minister Contest, Reports Reuters

By Ankur Banerjee and Linda Pasquini

SINGAPORE/LONDON – The yen made a notable recovery on Friday, bouncing back from earlier losses following the election of Shigeru Ishiba, Japan’s former defence minister, as the new leader of the ruling Liberal Democratic Party, positioning him to become the country’s next prime minister.

Ishiba, known for his criticism of previous monetary stimulus policies, indicated that he supports the current approach taken by the central bank, especially regarding recent interest rate hikes.

The yen rose more than 1%, trading at 143.05 yen per dollar, following a drop to 146.49 earlier in the day, its lowest point since September 3.

Market participants were preparing for a potential victory by hardline nationalist Sanae Takaichi, a known opponent of further interest rate increases, making Ishiba’s win one of the most surprising outcomes in Japan’s recent leadership elections.

Analysts at UBS remarked that Ishiba’s success was unexpected, as many had anticipated Takaichi’s ascension. “This outcome is likely a relief for the Bank of Japan, alleviating some of the pressures regarding its rate-hiking strategy,” they noted.

The yen experienced broad gains, particularly against the euro, which dropped 1.56% to 159.305 yen.

Marcel Thieliant from Capital Economics highlighted Ishiba’s cautious tone recently, emphasizing that Japan has not yet fully conquered inflation. He stated, "The substantial increase in the yen following Ishiba’s success indicates that the market views this as a favorable sign for potential future rate hikes."

He added, "While our analysis suggests that the government has less influence over monetary policy decisions than is often perceived, Ishiba’s election victory is likely to be welcomed by Bank of Japan policymakers."

In other currency developments, the euro fell 0.45% to $1.1127 after inflation data from France and Spain came in below expectations. This led traders to increase their bets on a possible rate cut from the European Central Bank in October.

The derivatives market indicated that traders are pricing in nearly an 80% chance of a rate reduction during the ECB’s upcoming meeting, a significant increase from the previous week when the likelihood was minimal.