TOKYO -- Though Japan's cabinet reshuffle elicited little immediate reaction from the foreign exchange and stock markets here, some observers expect a stronger yen and weaker share prices should the government's approval rating fall further in the coming months.
The forex market stayed quiet as new ministers were announced one by one Thursday. The yen hovered in the 110.50 to 111 range against the dollar all day.
The reshuffle kept several key officials under Prime Minister Shinzo Abe in their posts, such as the chief cabinet secretary and the finance minister, so many expect policy directions to remain the same. A falling approval rating already loomed as a risk that could bolster Japan's currency, as recent polls showed support for the cabinet dropping below 40%.
"A big dent in the approval rating would diminish hopes that Abenomics will continue to buoy the economy," Akira Moroga of Aozora Bank said.
Moroga has expected that the planned U.S. interest rate hikes would soften the yen, but now thinks a plunge in support for the cabinet instead might bolster Japan's currency and erode share prices. He predicts the yen will move in the 108 to 115 range against the dollar for the next three months.
Even if the approval rating holds steady, the shakeup is unlikely to depreciate the yen. "It's not as if a second round of Abenomics will begin," Shuji Shirota of HSBC Securities said.
External factors would drive the yen, such as the Federal Reserve's monetary policy normalization. Japan's rising current-account surplus exerts appreciation pressure on the yen, a trend unlikely to be influenced by the cabinet change itself, Shirota said. He forecasts a range of 106 to 114 per dollar for the Japanese currency over the next three months.
Meanwhile, the stock market gave mixed reactions. Some short-term investors in Tokyo sold futures after seeing nothing prominent from the cabinet revamp. Yet persistent hopes that the government will lift spending to help the economy buoyed construction stocks, for instance. The Nikkei Stock Average edged down 0.25% Thursday to close at 20,029.
A rising approval rating would lure back some overseas investors who unloaded Japanese shares due to weak public support for the government, said Naoki Kamiyama of Nikko Asset Management. Kamiyama thinks the solid choices for new ministers will lift support slightly but that any market-buoying impact will be minimal. Newly appointed ministers could face scandals as well, but Kamiyama expects the Nikkei index to move between 19,800 and 20,800 over the next three months.
Ryoma Sugihara of Societe Generale Securities expects the Nikkei to range from 19,500 to 21,000. The reshuffle is not powerful enough for a full-fledged recovery of the cabinet's approval rating, so the impact to the market will be limited, he said.