Ahead Today
G3: US Leading Index
Asia: China loan prime rate, India infra index
Market Highlights
Following Japan’s Upper House Elections, Japanese Prime Minister Shigeru Ishiba vowed to remain in his job even as his LDP-led coalition finished without a majority in both the Upper and Lower House for the first time in seven decades. While the outcome was not as bad as some of the early exit polls had suggested, Prime Minister Ishiba was still not able to clear the low bar he earlier set of retaining a majority in the upper house. Historically, the last three LDP prime ministers who lost an upper house majority stepped down within two months, including Shinzo Abe in 2007 during his first stint as premier, which could provide a rough timeline for Ishiba right now. In the very near term, PM Ishiba is leaning on trade negotiations with the US as a key priority focus, but any signs that goes badly perhaps in terms of inability to receive concessions may lead to a greater acceleration in timeline to select a new leader within the LDP ranks. The key transmission mechanism to FX markets as well is greater pressure on fiscal position including calls within the opposition to cut the sales tax which may put some pressure on JGB yields over the medium-term.
If we do see some further selling pressure on Japanese Yen moving forward, this would also have some spillovers to other Asian currencies given its importance as an anchor currency our region. This may include the likes of KRW, TWD and THB which are more sensitive from a fundamental perspective to movements in the Japanese Yen. Nonetheless, given that the source of the shock is quite JPY specific through fiscal and political uncertainty in Japan, rather than through global factors such as higher US rates, we lean towards thinking that the negative spillover to Asia-ex-Japan FX should be reasonably modest.
Beyond Japan, the other key running theme is continued perceived attacks on the independence of the US central bank. US Treasury Secretary Scott Bessent has called for an inquiry into the “entire Federal Reserve Institution”, in the latest sign of how top Trump administration officials are cranking up pressure on the central bank. Bessent told CNBC on Monday that they need to “examine the entire Federal Reserve institution and whether they have been successful”, and said that if the Federal Aviation Administration had made as many mistakes, then “we would go back and look at why this has happened”. While at face value these comments on judging an institutions’ performance are not wrong, it fits into the broader theme of continued policy uncertainty in the US together with the changing nature of institutions, and over the medium-term could weigh on the US Dollar as investors and market participants alike increase hedging of their US Dollar overweights even as there hasn’t yet been material signs of outright selling of US assets.
