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Financial Market Response following the Japanese Leadership Election

Currency strategists at leading banks have reportedly closed their positions to hold a bullish stance on Japan’s currency after the country’s leading political group elected Sanae Takaichi as the new leader.

In a report named “Getting out of the yen,” a global head for currency analysis stated:

Our strategy was bullish on the yen as part of our strategy but have now exited due to the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty around Japan’s policy priorities and the expected date of BoJ monetary tightening.

Analysts concur that inflationary pressures exist for Japan, but questions are mounting about the approach to managing it.

The analyst additionally noted indicators of government influence across Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches the $4,000 Threshold

The gold price are hitting fresh record highs, today, during its best performance since 1979.

The current price of bullion has jumped by over 1% in recent trading to $3,944 per ounce, nearing the $4000/oz mark.

This indicates the gold price has surged half again from the beginning of the year, likely to achieve its strongest yearly performance in over 45 years.

Bullion has advanced this year because of various drivers, including increasing fears that national debt levels cannot be maintained.

The new leader’s victory in the Japanese election will only have reinforced concerns that leaders could seek to boost output via increased debt and lower interest rates, and depend on rising prices to diminish the worth of the resulting debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak this morning, while the yen is plunging, following the chief role of the governing party was surprisingly won by fiscal dove Takaichi.

Forecasts that Takaichi is likely to be a pro-stimulus prime minister has sparked a surge of optimistic trading lifting Japan’s benchmark index higher by five percent, as it gained more than 2300 points ending at 48,085.

Yet the Japanese yen is trending the opposite way – it dropped about 2 percent relative to the USD at 150.3¥/$.

Takaichi, set to be the nation’s initial woman PM in the coming weeks, has long admired of Thatcher. Yet even though her social policies are right-leaning regarding social issues, Takaichi adopts a different strategy to fiscal policy, and promotes increased public expenditure and accommodative central bank measures.

Consequently, she’s expected to continue Japan’s push to stimulate its economy through public investment and cheap credit, potentially causing rising inflation and more debt.

As a result the falling currency, as markets predict fewer interest rates hikes in Tokyo compared to earlier expectations.

Japanese long-term bond prices are also down today, driving higher the yield on thirty-year bonds approaching peak levels, due to forecasts of more government loans and sustained inflationary pressures.

The markets will be calculating how closely Sanae Takaichi’s policies will resemble the Abenomics strategy implemented by former PM Shinzo Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from talking up the Abenomics program in the recent vote, but many are aware her core beliefs and her appreciation of the former PM’s Three Arrows philosophy.

Investors might thus seek to gain understanding regarding her stance, as well as exactly how influential she could be in directing the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase potentially on the table...

Economic Calendar

• 8.30am BST: European construction data for last month
• 09:30 BST: UK construction PMI for September
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year