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Market Reactions to Japan's Political Shift

FX analysts at major financial institutions have terminated their recommendations to hold an optimistic view regarding Japan’s currency following the country’s leading political group chose Takaichi to be its head.

In a report called “Exiting the yen,” one global head for foreign exchange explained:

Our strategy was bullish on the yen within our portfolio but have closed this due to the party leadership vote. Takaichi’s unforeseen success creates renewed unpredictability around Japanese economic goals and the timing of BoJ monetary tightening.

There is agreement that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The analyst additionally noted that signs of fiscal dominance in Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Closes In On $4,000 per ounce Mark

Bullion values are hitting unprecedented levels, again, in its top-performing period since 1979.

The spot price of gold has jumped by over 1% today reaching $3,944/oz, approaching the $4000/oz mark.

This means gold’s value has increased by 50% from the beginning of the year, likely to achieve its best annual gains since the late 1970s.

Bullion has advanced throughout the year because of various drivers, such as increasing fears that public borrowing cannot be maintained.

Takaichi’s election win in the Japanese election has further strengthened apprehensions that leaders will attempt to boost output by borrowing more and lower interest rates, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has surged to an all-time peak today, with the currency dropping, following the top position of the country’s ruling party went unexpectedly to by fiscal dove Takaichi.

Predictions that Takaichi is likely to be a leader supporting government spending has sparked a rush of positive investment driving the Nikkei 225 share index up by 5%, as it gained more than 2300 points to finish at 48,085.

Yet the Japanese yen is heading downward – it has fallen nearly two percent against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan soon, is a long-time admirer of Thatcher. Yet even though she is conservative in social matters, the new leader takes an un-Thatcherite approach in economic policy, and promotes higher state investment and accommodative central bank measures.

Consequently, she’s expected to continue the national effort to stimulate its economy via government outlays and lower interest rates, potentially causing higher inflation and more debt.

Thus yen depreciation, as investors anticipate less monetary tightening by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices have also fallen today, lifting the return on thirty-year bonds near to peak levels, on expectations of higher borrowing and lasting price increases.

Traders are evaluating how closely Takaichi’s plans will mirror the “Abenomics” programme implemented by ex-prime minister Abe.

A market expert noted:

Different from previous comments, Takaichi has refrained from highlighting the Abenomics program in the recent vote, but most know her underlying stance and her appreciation of Abe’s Three Arrows strategy.

Investors might thus seek to obtain clarity on that position, as well as exactly how influential she may be in forming monetary policy, ahead of the BoJ’s next meeting is viewed as a potential turning point and a rate rise seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for September
• 9:30 AM UK time: British construction figures for the last month
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to speak at an investment conference this year