Ahead Today
G3: Germany ZEW expectations, US ADP Weekly Employment Change
Asia: China loan prime rate, Malaysia CPI, Malaysia trade, Taiwan export orders
Market Highlights
JGB bond yields rose sharply, while USD/JPY moved up above the 158 level with some FX underperformance, as markets digested the implications of the upcoming 8 Feb snap Lower House elections. Meanwhile, Asian currencies continued to show divergence, with outperformance in the Chinese renminbi contrasting with underperformance in the high-yielders such as IDR, INR, PHP, driven partly by fiscal concerns in these countries.
Japanese Prime Minister Sanae Takaichi officially called for an early election for 8 February, with the dissolution of the House of Representatives on 23 January. She has set a reasonably modest goal publicly of maintaining a majority of 233 seats with the LDP and Ishin no Kai, even as she has highlighted that the LDP must be prepared to fight a tough election ahead. Public polling shows that PM Takaichi remains very popular with ratings well ahead of 70%, while some initial surveys also suggest that the LDP may be able to win a majority on their own. Nonetheless, elections outcomes are never static with outcomes also be shaped by what the opposition does, among other factors. On that front, the merger of CDP, which is the largest opposition party in Japan, together with Komeito, which was in alliance with the LDP for the longest time, into the “Centrist Reform Alliance” could certainly shake things up by providing a moderate alternative to PM Takaichi’s current coalition at least on paper.
From a markets perspective, the big moves have thus far been in JGB bond yields with the 10-year rising sharply towards 2.3% and the 30-year yield now closer to 3.7%, and from an FX perspective some consolidation in USD/JPY given mixed drivers from broader changes in global risk sentiment. Prime Minister Takaichi emphasised during the statements yesterday that she would suspend the consumption tax on food for two years, but wanted to make sure these tax cuts can be implemented without relying on additional bond issuance. With the consumption tax cut potentially costing around JPY 5 trillion annually in revenue (US$31bn), the policies to funding these tax cuts will be important for markets. Nonetheless, with the opposition alliance also making adoption of a permanent cut to consumption tax on food one of its flagship policies, the sharp moves in JGB bond yields and with that also JPY FX weakness make sense at least so far. The good news overall is that PM Takaichi is publicly taking the financial market response into account including from the JGB market and fiscal concerns may abate over time assuming election uncertainty fades.
For now, our global team sees JPY as under pressure near-term, but with USD/JPY likely to resume its downward trend over time once we get better clarity from the election over time, and as the BOJ resumes rate hikes later this year. We are currently forecasting USD/JPY moving below the 150 handle by the end of 2026.
Meanwhile, the big FX movers in Asia include sharp weakness in IDR and INR, and to a smaller extent underperformance in PHP, and juxtaposed with continued resilience in CNY and CNH. Fiscal concerns are key for all three higher-yielding Asian currencies, and for the Indonesian Rupiah continued and rising concerns around central bank policy independence. Indonesian president Prabowo Subianto has nominated his nephew – Thomas Djiwandono – currently Indonesia’s deputy finance minister, as one of three names to replace Bank Indonesia Deputy Governor Juda Agung who resigned. The markets have perceived this rightly or wrongly to be a potential impact on BI’s central bank independence, and when combined with rising pressure on Indonesia’s fiscal deficit to rise above the current 3% cap has led to further FX pressure. We continue to see IDR underperforming on these continued dynamics.
