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Japan’s Nikkei 225 on watch with impending leadership change

The Nikkei 225 Index has jumped close to 1.6% to start the week. What can we look out for?

Source: Bloomberg

What to expect with Japan Prime Minister Yoshihide Suga’s resignation

Japan Prime Minister Yoshihide Suga has announced not to seek re-election as ruling-party leader last week, marred by a sinking approval rating partly due to perceived inadequacy for his Covid-19 responses. The race is therefore on to find the next successor, with less than a month to go before the party’s leadership appointment on 29 September. Based on an opinion poll conducted by Kyodo News, the top contender thus far is Taro Kono, Japan’s Covid-19 vaccine minister, with a 31.9% approval rating. This is followed by Shigeru Ishiba, who came in second with a 26.6% rating. The potential views of some of the key contenders are summarised below.

*Opinion poll by Kyodo News was conducted on 4-5 September, asking 1,071 randomly-selected eligible voters on their choice for next prime minister.

While public opinions are important, the contenders also need to seek factional support, which seems highly uncertain at the moment. Highly-watched factions, such as the Shikōkai and Hosoda factions, are yet to commit to their candidate of choice and the rally for support is expected to be highly watched over the coming weeks.

As Suga’s rising unpopularity partly stems from perceived inability on his part to manage the Covid-19 pandemic, the new prime minister will seek to address this issue. This seems to bring high hopes of further economic stimulus to aid businesses and also bolstering of healthcare systems to tackle elevated Covid-19 cases. There may be some resistance with Japan’s government debt at 256% of GDP, but with ultra-low rates and the Bank of Japan (BoJ) holding more than half of all government bonds, the elevated debt may seem less of a problem. Other standpoints under a new leadership may remain largely unchanged, with Japan’s monetary policies on hold and tough stance towards China to continue.

Technical analysis – Japan 225

The Japan 225 index has broken above the upper trendline of its descending triangle pattern last week, signalling a shift in sentiments to the upside. This comes after its moving average convergence divergence (MACD) indicator forms a higher low, suggesting that downside momentum could be weakening. Bullish sentiments are riding on the expectations of an economic stimulus package to combat the Covid-19 pandemic from the new leadership. Currently, prices are hovering around 29,500, which will provide as near-term support. Resistance may be at 30,200 resistance level, where the index was weighed down on previous two occasions.

Source: IG Charts

Technical analysis – USD/JPY

The USD/JPY (大口) has largely been trading in a rectangle pattern since July this year, with a flat-lined MACD indicator suggesting ranging movement for now. After an initial bounce in reaction to the political catalyst, the gains were quickly pared back along the rest of the day. Near-term support may seem to be at 109.00, where the lower base of the rectangle pattern may serve as support, as it has been for the previous three occasions. Resistance may be at 110.60, near the upper range of the rectangle.

Source: IG Charts

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