USD/JPY plunges amid reports of Shinzo Abe’s resignation

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• Yen jumps ahead of Abe's rumoured resignation as prime minister
• Growing concerns surrounding Abe's ability to serve out his term due to ill health
• Upsides still expected for USD/JPY following US Fed's dovish statement

USD/JPY sees biggest drop in two weeks

The USD/JPY (大口） fell sharply after it was reported that Japan prime minister Shinzo Abe would be stepping down from his post.

The currency pair lowered to 106.104 at 14:00 JST on Friday 28 August 2020 – the largest decline seen in two weeks.

IG’s market data shows that ‘sells’ form 51% of all trades on the USD/JPY counter so far this week.

Additionally, 58% of all opened orders on the forex major currently hold ‘buy’ (long) positions, still indicating a near-term expectation for price to rise.

Shinzo Abe set to step down due to ill health

Japan public broadcaster NHK reported earlier on Friday that Abe will announce his resignation from office during a scheduled press conference due to start at 17:00 local time.

Abe is reportedly stepping down because of ill health, following two recent hospital visits within the span of one week.

This week, media speculation about whether Abe would be able to serve out his current term as prime minister, due to end in September 2021, have been rife.

Members of Abe’s political party, Liberal Democratic Party (LDP), have since attempted to put those concerns to rest, stating that their party leader is ‘already on the mend’.

Government chief spokesperson Yoshihide Suga also told the media that he has been meeting with Abe twice a day, and had not noticed anything worrying regarding the prime minister’s health.

‘It’s premature to talk about “post-Abe”, as he still has over a year left in his term,’ Suga was quoted as saying.

This past Monday (24 August 2020) marked Abe’s eighth year in office, become Japan’s longest serving leader, surpassing his great-uncle Eisaku Sato’s seven years and ten months reign.

‘What is clear is that Abe's health is not in good shape,’ Mikitaka Masuyama, a professor of politics at the National Graduate Institute for Policy Studies, told AFP news agency.

‘But I think he will stay in office while managing his illness.’

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Why are upsides still expected for USD/JPY?

Nevertheless, the USD/JPY had moved comfortably higher 12 hours earlier, after backend US Treasury yields shot up following US Fed chair Jerome Powell’s decision to let inflation to stay above the 2% target ‘for some time’, in a bid to boost the economy.

Following that, OCBC FX strategist Terence Wu had written that firm resistance could be seen near the 107.00 area, adding that a successful breach may put 108.00 into view.

‘Much will depend on whether the move in the US Treasury space will see further traction. Immediate support at 106.60,’ he stated.

He also noted that if US Treasury yields sustain a move higher overnight, ‘yield differentials may potentially come into play in favour of the USD’.

‘In such a situation, expect the USD/JPY to be the most reactive to the upside’.

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