After the "flash crash," how will the yen move forward?

"The successor of Abe," Sanae Takaichi, won the Liberal Democratic Party presidential election, triggering a "collapse" of the yen, with the USD/JPY exchange rate breaking through the 153 mark. Both Nomura and Citigroup believe that the yen will continue to decline in the short term, with Citigroup expecting the USD/JPY to rise to the 154-155 range.

According to news from the trading desk, Nomura Securities stated in its latest research report that political uncertainty has become the market focus. The Democratic Party has announced that it will not join the LDP-Komeito coalition for the time being. According to the latest report from NHK, the Komeito Party plans to withdraw from the ruling coalition with the LDP, and the ruling coalition in Japan is expected to dissolve on Friday.

Nomura stated that the outcome of the coalition will directly affect the yen's movement. If the LDP governs alone, it may trigger a "Takaichi trade" reversal, leading to a decline in the stock market, a sell-off of ultra-long-term government bonds, and further depreciation of the yen.

Citigroup's analysis indicates that in the short term, the USD/JPY exchange rate may rise to the 154-155 range. However, Citigroup maintains a long-term view, believing that since the exchange rate significantly dropped from around 160 last summer, the USD/JPY has been forming a large triangular top pattern, with the neckline around 140.

Yen Breaks Key Resistance Level, Authorities Remain Silent

The USD/JPY further rose after the London trading session opened, breaking through the 153 level. Despite the rapid depreciation of the yen since the beginning of this week, Japanese authorities have not yet intervened verbally today, and the market seems to be testing the Takaichi government's tolerance for a weak yen.

From the perspective of interest rate differential trading, the yen remains an unattractive currency. Despite the increasing political uncertainty in Japan, the momentum behind the "Takaichi trade" still exists, which may allow the USD/JPY to continue rising in the short term.

Citigroup's analysis shows that the significant drop of the USD/JPY from around 160 to about 140 last summer marked a turning point in the long-term downtrend of the yen. Since then, the currency pair has been forming a large triangular top, with the neckline around 140, revolving around the 350-day moving average.

Ruling Coalition Negotiations Determine Yen's Fate

The core of the current political landscape is whether the LDP-Komeito coalition can be maintained. Democratic Party leader Yuichiro Tamaki stated that the party will not immediately join the LDP-Komeito coalition at least at the start of the extraordinary Diet session, while also refusing to support a unified opposition candidate in the prime ministerial election.

If the Democratic Party temporarily refuses to join the coalition as reported, and the Komeito Party withdraws from the alliance with the LDP, the LDP will face a situation of governing alone with a weak legislative position.

Nomura Securities' analysis points out that the outcome of the ruling coalition will have drastically different impacts on the yen:

• Bullish Scenario: If the alliance between the LDP and Komeito is maintained, or if a finance minister with a less dovish policy stance is appointed, market concerns about the supply and demand of Japanese government bonds will ease, thereby supporting the yen.

• Bearish Scenario: If the LDP ends up governing alone, political uncertainty will rise significantly, potentially leading to a reversal of the "Takaichi trade," triggering a decline in the stock market, a sell-off of ultra-long-term government bonds, and further depreciation of the yen According to a previous survey by Nomura, 59.6% of respondents expect the Liberal Democratic Party (LDP) and Komeito alliance, 28.9% expect an expanded alliance or LDP-Democratic Party alliance, and 11.5% expect other scenarios.

"Sanae Economics" is not simply Abe Economics 2.0, the long-term technical pattern of the yen is forming a triangle top

Citigroup emphasizes that Sanae Takaichi's economic policy ("Sanae Economics") is unlikely to be a simple reproduction of Abe Economics 2.0. This is mainly based on three reasons:

First, the internal political landscape of the LDP has changed. Former Prime Minister Taro Aso played a key role in Takaichi's victory, serving as the LDP's vice president, while her brother-in-law, Toshikazu Suzuki, serves as the LDP's secretary-general. Both fundamentally oppose overly expansionary fiscal policies.

Second, the economic environment has fundamentally changed. Ten years ago, Japan faced deflation and yen appreciation issues, whereas now it faces inflation and yen depreciation challenges. The Nikkei 225 index has risen from around 10,000 points at that time to nearly 50,000 points.

Third, U.S. Treasury Secretary Janet Yellen and other U.S. financial authorities have expressed concerns about Japan's expansionary fiscal policies and have publicly called for the normalization of the Bank of Japan's policies.

Citigroup maintains its long-term view that since the exchange rate significantly dropped from a high of around 160 last summer, the USD/JPY has been forming a large triangle top pattern, with the neckline around 140.

This pattern is centered around the 350-day moving average (currently around 150), which has acted as a support line during 2023 to 2024. Although the USD/JPY may rise to the +1σ band in the short term, the process of forming the triangle pattern will remain intact.

Citigroup believes that when the exchange rate breaks below the long-term neckline, a turning point in the long-term trend will occur, but currently, the downward target for the fourth quarter needs to be adjusted upward