Japan's New Prime Minister and the Yen: Market Talk with Francesco Pesole

Japan's New Prime Minister and the Yen

• 🇯🇵 Sanae Takaichi has become Japan's first female prime minister, a development that initially caused the yen to slide.
• 💡 While Takaichi is known to favor fiscal stimulus, her coalition partner is more moderate, limiting aggressive spending.
• ⚠️ The government is likely to be cautious about the yen's depreciation and may not want to delay the Bank of Japan's rate hikes significantly, as a weaker yen increases inflation.

Bank of Japan Monetary Policy

• 📈 Markets had priced in the Bank of Japan holding off on further rate hikes, but there's a possibility of a surprise hike later this month.
• 📉 The expectation of rate cuts later this year by the Bank of Japan suggests markets are not yet drawing firm conclusions about fiscal implications.
• 🏦 The Bank of Japan's monetary policy normalization path is not expected to be meaningfully derailed by the new government's fiscal stance.

US Federal Reserve and Economic Data

• 📊 The US Federal Reserve has limited official data due to a government shutdown, but has other indicators suggesting a slowdown in the job market.
• 📉 If upcoming inflation numbers are not worrisome, the Fed likely has a green light to cut rates at the current meeting.
• ⚠️ A significantly hot inflation number would be required to delay Fed rate cuts, given the existing justification for cuts based on prior data and Fed communications.

US Dollar Forecast

• 💰 ING FX strategist Francesco Pesole expects the US dollar to fall further by year-end.
• 🎯 The forecast anticipates two Fed rate cuts this year and potential for more in early 2026, alongside the dollar's seasonal weakness towards year-end.
• 💲 The target for the dollar is $120 by the end of the year.