Yen Slumps to Weakest Since February in LDP-Results Aftermath

Sanae Takaichi speaks during a news conference at the Liberal Democratic Party headquarters in Tokyo on Oct. 4.

(Bloomberg) -- The yen slid further on Wednesday after touching the weakest level since February against the dollar, as Sanae Takaichi’s surprise win as the new leader of Japan’s ruling Liberal Democratic Party continued to weigh on the currency.

The Japanese currency weakened to as low as 152.34 against the greenback, while moving to a fresh record against the euro since the common currency’s inception in 1999. The markets curbed their expectations for a Bank of Japan interest-rate hike in the aftermath of the victory by the pro-stimulus lawmaker.

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“We are only getting started on what the post-LDP leadership change implies for fiscal and monetary policy,” said Aroop Chatterjee, a strategist at Wells Fargo. “The BOJ was already sounding somewhat unconvinced on the October hike.”

Just weeks before the BOJ’s next meeting, one of Takaichi’s closest economic advisers said that a rate increase in December would be better timed. Takaichi, who is poised to become Japan’s prime minister in a parliamentary vote on Oct. 15, has indicated she wants the BOJ to proceed cautiously on rate increases and favors close communication between the central bank and the government.

“The presumption here is that the new government under Sanae Takaichi exerts all its influence to deliver a stronger economy,” wrote ING analysts Chris Turner and Francesco Pesole Tuesday. “The ‘Takaichi trade’ has indeed delivered a steeper yield curve, an equity rally and a weaker yen.”Sanae Takaichi speaks during a news conference at the Liberal Democratic Party headquarters in Tokyo on Oct. 4.Photographer: Toru Hanai/Bloomberg

The yen’s weakness has revived interest in a once-popular strategy known as the carry trade, where investors borrow the low-yielding yen and buy currencies such as the Brazilian real or Australian dollar that offer higher returns. Traders have slashed policy-tightening wagers, with overnight index swaps now seeing a 25% chance of a move at the BOJ’s Oct. 30 meeting, compared to about 57% in the run-up to the leadership vote.

Bank of America Corp. changed its forecast to a weaker yen after the election results, expecting the currency to end this year at 155 per US dollar, up from 153 in its previous outlook, “given increased political and fiscal risks.” Deutsche Bank turned neutral on the yen from bullish after the vote.

Hedging against additional yen depreciation has become more expensive. The premium paid to hedge against the yen falling relative to gains against the greenback over the next month has risen to the highest level in more than three years.

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--With assistance from George Lei and John Cheng.

(Updates with latest market moves, more context.)

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