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Financial Market Response to the Japanese Leadership Election

Foreign exchange experts at prominent investment firms have closed their recommendations to hold a bullish stance regarding the Japanese yen after the country’s ruling party chose Sanae Takaichi as its leader.

In commentary titled “Leaving yen positions,” a chief for currency analysis explained:

We went long JPY as part of our strategy but have now exited due to the weekend’s election result. Takaichi’s unforeseen success creates significant doubt regarding Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem for Japan, but uncertainty is now going up again about the approach to managing it.

The strategist additionally noted indicators of government influence across Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000 Mark

The gold price are achieving fresh record highs, once more, in its strongest year since 1979.

The immediate value of gold has climbed more than 1 percent today at $3,944 an ounce, approaching the $4000/oz mark.

This means gold’s value has jumped by 50% since January 1st, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen this year due to multiple reasons, including rising concerns that national debt levels are unsustainable.

The new leader’s election win in the Japanese election will only have reinforced apprehensions that leaders will attempt to boost output through higher borrowing and lower interest rates, and use inflation to erode the value of accumulated debt.

Market Overview

Japan’s stock market has jumped to unprecedented levels in Monday trading, as the yen falls, following the top position of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Forecasts that the new leader will become a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving the Tokyo stock index higher by five percent, as it gained 2315 points ending at just over 48,000.

However, the currency is very much moving in the other direction – it dropped nearly two percent against the US dollar at 150.3¥/$.

The incoming leader, who should become the nation’s initial woman PM later this month, is a known fan of Thatcher. However, while she holds conservative views in social matters, she adopts a different strategy on budget matters, and has advocate higher state investment and loose monetary policy.

As such, analysts anticipate to continue the national effort to boost economic growth through public investment and reduced borrowing costs, which would lead to increased price pressures and increased borrowing.

Hence the weaker yen, with traders expecting reduced rate increases by Japanese authorities compared to earlier expectations.

The nation’s debt securities have also fallen in Monday trading, pushing up the return on thirty-year bonds near to all-time highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets are assessing to what extent Sanae Takaichi’s plans will resemble the policies of Shinzo Abe implemented by previous leader Abe.

One analyst noted:

Different from previous comments, the leader has avoided from talking up the Abenomics program in this LDP leadership campaign, but most know her core beliefs and her appreciation of the former PM’s three-arrow strategy.

Traders may therefore move for more information regarding her stance, plus the degree of influence she could be in shaping the central bank’s decisions, given the October BoJ meeting is considered a key event and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: European construction data for September
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: BOE chief Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit this year