The Japanese yen has depreciated sharply following the election of Sanae Takaichi as leader of Japan's major right-wing party, the Liberal Democratic Party (LDP), who is expected to be appointed prime minister in a few days.
For the first time in its history, Japan will be led by a woman. But this will not change the country's economic policy.
On the contrary, in favour of an expansionary fiscal policy and fiercely opposed to the Bank of Japan's monetary normalisation project, Sanae Takaichi wants to return to the traditional policies of recent decades. Meanwhile, her opponents within the LDP pleaded for a little fiscal austerity to contain a public debt of more than 200% of GDP.
A fertile situation for speculation
As Sanea Takaichi's victory sent the yen tumbling on the foreign exchange market, it also propelled Japanese stocks to new highs on the Tokyo Stock Exchange.
Speculators are counting on a massive fiscal stimulus to boost Japanese economic activity in the short term artificially. The depreciation of the yen also mechanically inflates the profits made abroad by the large Japanese multinationals.
Bad news in a broader outlook
Beyond the short term, however, the weakness of the yen is awful news. It is fuelling inflationary pressures via higher import prices.
This erodes household purchasing power and depresses domestic demand, already weakened by the ageing of the population, to the great dismay of Japanese companies, mainly active on the national territory.
The major international groups are also not happy about the weakening of the yen. They have long since massively relocated their production abroad and therefore have less need for a weak currency to sell outside the archipelago.
By sharply increasing the price of imports, particularly energy, the extreme weakness of the yen is undermining the competitiveness of factories still located in Japan. It also complicates the necessary recruitment of foreign workers who turn to countries offering more advantageous salaries, given the exchange rate.
Tokyo needs reforms to grow truly
Japan needs fiscal restraint, a stronger yen, and reforms to counterbalance the rapid ageing of the population and sustainably succeed in its economic revival.
Unfortunately, this is not the path that the next Prime Minister wants to take. That's why we don't buy Japanese assets. See our complete asset allocation strategy here.