Japanese Yen Plummets After Prime Minister's Resignation Shakes Markets

Japanese Yen Tumbles as Political Crisis Collides with Fed Rate Cut Speculation

The Japanese yen suffered sharp losses across major currency pairs Monday following Prime Minister Shigeru Ishiba's resignation announcement, while the US dollar retreated on weak jobs data that has reinforced expectations for Federal Reserve rate cuts this month. The dual developments highlight how political instability and monetary policy divergence continue to drive volatile currency swings in early 2024.

Yen Weakness Spreads Across All Major Pairs

The yen's decline was broad-based during Asian trading, falling 0.6% against the dollar to 148.25 - a level that brings back memories of the Bank of Japan's intervention threats in late 2022. More dramatically, the Japanese currency hit its lowest point in over a year against both the euro and British pound, reaching 173.91 and 200.33 respectively.

This multi-front retreat suggests investors are pricing in prolonged political uncertainty in Japan, potentially delaying any meaningful economic reforms or fiscal policy changes that might support the currency.

Dollar Loses Steam Despite Yen Gains

While benefiting from yen weakness, the dollar struggled against other major currencies as Friday's disappointing US jobs report continued to weigh on sentiment. The pound slipped 0.11% to $1.3492 after Friday's 0.5% surge, while the euro declined by the same margin to $1.1709, retreating from its month-high reached last week.

The dollar index held steady at 97.87, consolidating after Friday's 0.5% decline - a pattern that suggests markets are recalibrating expectations for Fed policy rather than making dramatic directional bets.

Political Risk Premium Returns to Japanese Assets

Ishiba's resignation after less than three months in office marks Japan's return to the political instability that characterized much of the 2000s and early 2010s. For currency markets, this raises questions about policy continuity, particularly regarding the Bank of Japan's gradual shift away from ultra-loose monetary policy.

Unlike previous episodes of Japanese political turmoil, this comes at a time when the BoJ is navigating its first significant policy normalization in decades. The uncertainty could force the central bank to move more cautiously on rate hikes, widening the policy gap with other major economies.

Fed Rate Cut Bets Reshape Dollar Outlook

The weak US jobs data has effectively sealed expectations for Federal Reserve easing this month, creating a complex dynamic where dollar strength depends increasingly on relative weakness elsewhere rather than domestic strength. This shift explains why the dollar can gain against the yen while losing ground to European currencies.

For traders and investors, this environment suggests continued volatility in currency markets, with political developments likely to matter as much as economic data. The yen's weakness despite Japan's improving fundamentals demonstrates how quickly political risk can override economic logic in foreign exchange markets.

Commodity Currencies Show Resilience

The Australian dollar edged up 0.05% to $0.6558, while the New Zealand dollar dipped marginally to $0.5891, showing relative stability compared to the major developed market currencies. This resilience likely reflects expectations that Fed rate cuts could boost global risk appetite and commodity demand, benefiting resource-linked economies.