The Japanese Yen (JPY) remains under pressure following weaker-than-expected wage growth data released earlier today. While nominal wages rose 1.5% year-on-year, the figure disappointed expectations and marked a further decline in real wages, which are adjusted for inflation. This trend reflects a familiar dynamic: nominal gains outpaced pre-pandemic levels, yet rising inflation continues to erode purchasing power, notes Volkmar Baur, FX analyst at Commerzbank.
Yen Weak for Now, But the Tide May Turn
Despite today’s soft wage data, the primary driver of JPY weakness appears to be political uncertainty following internal elections in Japan’s ruling Liberal Democratic Party (LDP). Over the weekend, Sanae Takaichi was elected party chair—making her the first woman likely to become Japan’s prime minister, with her appointment expected on October 15.
However, Baur highlights that Takaichi will face a very different political landscape compared to her predecessor, Shinzo Abe. She will likely lead a minority government, limiting her ability to push through policy without cross-party cooperation.
“Compromises will be necessary,” Baur notes, adding that public dissatisfaction with high inflation and falling real incomes will shape the policy agenda.
Could a Stronger Yen Be Part of the Solution?
While expansionary fiscal policy could be one response, Commerzbank warns that this might further fuel inflation. Instead, Baur argues that the more effective solution to curbing inflation would be a stronger Yen, as an appreciating JPY would help reduce import prices, especially for essential items like food and energy.
“I do not believe the JPY will remain weak for much longer,” says Baur. “On the contrary, political developments may trigger a moderate appreciation in the coming weeks and months.”
Outlook: Watching the New Government Formation
While near-term JPY weakness is being driven by political shifts, medium-term appreciation risk is rising, especially if the new government focuses on addressing inflation and purchasing power concerns through currency-strengthening policies.
For now, analysts remain cautious, waiting to assess:
- The structure of the new government,
- The fiscal policy direction Takaichi will pursue,
- And the Bank of Japan’s potential response in a changing political context.