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Market Reactions to Japan's Political Shift

Foreign exchange experts from major financial institutions have closed their previous recommendations to hold an optimistic view on the yen following the country’s ruling party chose Sanae Takaichi as its leader.

In a report titled “Leaving yen positions,” a lead strategist of FX research stated:

We held a long yen position in our FX Blueprint but have closed this due to the LDP election outcome. Takaichi’s unforeseen success reintroduces renewed unpredictability regarding Japan’s policy priorities and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue for Japan, but uncertainty is now going up again about the approach to managing it.

The expert further cautioned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000/oz Mark

Gold prices are hitting unprecedented levels, again, in its top-performing period in over four decades.

The immediate value of gold has climbed by 1% or more this morning reaching $3,944/oz, approaching the $4000/oz mark.

This means bullion prices has surged half again since the start of January, heading for its best annual gains in over 45 years.

Bullion has advanced throughout the year by several factors, such as growing worries that national debt levels may be unmanageable.

Takaichi’s election win in the party vote is likely amplifying worries that politicians may try to stimulate the economy through higher borrowing and reduced rates, and depend on rising prices to diminish the worth of accumulated debt.

Market Overview

Japan’s stock market has rallied to a record high in Monday trading, while the yen is plunging, after the chief role of the country’s ruling party went unexpectedly to by spending advocate Sanae Takaichi.

Predictions that Takaichi will become a PM favoring economic stimulus has ignited a rush of positive investment driving Japan’s benchmark index higher by five percent, adding over 2300 points to finish at 48,085.

However, the currency is trending the opposite way – it has fallen almost 2% relative to the USD at 150.3¥/$.

Sanae Takaichi, who is expected to become Japan’s first female prime minister in the coming weeks, is a known fan of Thatcher. But although she holds conservative views on social policy, she adopts a different strategy on budget matters, and promotes increased public expenditure and loose monetary policy.

Consequently, markets predict to continue Japan’s push to boost economic growth though fiscal spending and cheap credit, likely resulting in rising inflation and more debt.

Thus the falling currency, as investors anticipate less monetary tightening in Tokyo compared to earlier expectations.

Japan’s government bond values are also down this session, lifting the yield on thirty-year bonds near to all-time highs, because of predictions of increased debt issuance and more persistent inflation.

Traders are assessing the degree to which the new leader’s proposals will echo the “Abenomics” programme advocated by ex-prime minister Abe.

A market expert commented:

In contrast to last year, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but most know her fundamental position and her support of Shinzo Abe’s three-pillar approach.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she might become in shaping the central bank’s decisions, given the October BoJ meeting is considered a “live” affair and a rate rise considered likely...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for the previous month
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: Central bank head Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit this year