Volatility Risks Rise in Japan Markets With Ishiba Set to Depart

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The yen slid as much as 0.7% against the dollar in early trading Monday, after being among the weakest of its Group of 10 peers last week. Stocks are exposed to cross currents that make choppy moves likely. Initial indications from futures traded in Chicago pointed to a small gain when equities open in Japan, with contracts traded in the US moving higher than those last traded in Osaka.

Long-maturity Japanese sovereign bonds stand out as being particularly vulnerable to selling when that market gets underway later in the morning, given heightened concerns over government spending. The rally in US Treasuries on Friday has some potential to temper the initial moves in Japanese debt on Monday.

Although expectations for Ishiba’s eventual departure have been present following his ruling party’s poor election showing in July, traders are still trying to determine how much fiscal stimulus may come with potential successors, and to what degree any change could slow the next interest rate hike from the Bank of Japan.

“With the LDP lacking a clear majority, investors will be cautious until a successor is confirmed, keeping volatility elevated across yen, bonds and equities,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “Near-term, that argues for a softer yen, higher JGB term-premium, and two-way equities until the successor profile is clear.”

Any further spike in JGB yields would be of concern to global markets, which have been on guard for more spillover from Japan into debt trading in Europe and the US. Long-end yields have been rising on renewed fiscal concerns across major economies.

“While it remains unclear who will become the next prime minister, it’s difficult to envision anyone with a fiscal discipline stance better than or even equivalent to his,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management in Tokyo. “The weak performance of ultra-long-term bonds, driven by fiscal concerns, is likely to persist or even intensify.”