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Financial Market Response following the Japanese Leadership Election

Currency strategists from leading financial institutions have reportedly terminated their previous strategies for holding a long position on the yen after Japan’s leading political group elected Sanae Takaichi as its chief.

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

We went long JPY in our FX Blueprint but are now getting out following the weekend’s election result. The unexpected win by Takaichi brings back too much uncertainty around Japanese economic goals and the timing of BoJ monetary tightening.

Experts agree that inflationary pressures exist in Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert also warned that signs of fiscal dominance in Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000 Threshold

Gold prices are hitting new all-time peaks, once more, in its top-performing period since the late 1970s.

The immediate value of gold has jumped more than 1 percent in recent trading reaching $3,944/oz, as it closes in on the $4,000 threshold.

This shows gold’s value has jumped by 50% since January 1st, on track for its best annual gains since the Iranian Revolution.

Gold has been driven higher this year due to multiple reasons, among them increasing fears that national debt levels are unsustainable.

Sanae Takaichi’s victory in the party vote has further strengthened apprehensions that leaders will attempt to stimulate the economy by borrowing more and lower interest rates, and rely on inflation to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has rallied to an all-time peak today, as the yen falls, after the chief role of the country’s ruling party was unexpectedly secured by spending advocate Sanae Takaichi.

Forecasts that Takaichi will be a PM favoring economic stimulus has triggered a wave of enthusiastic buying that has pushed the Nikkei 225 share index to a 5% gain, rising by 2315 points to finish at 48,085.

Yet the Japanese yen is heading in the other direction – it dropped almost 2% versus the dollar to 150.3 yen per dollar.

The incoming leader, who should become the first woman to lead Japan in the coming weeks, is a long-time admirer of Thatcher. However, while she is conservative regarding social issues, she follows a contrasting path to fiscal policy, and supports higher state investment and accommodative central bank measures.

Consequently, analysts anticipate to maintain the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing rising inflation and greater borrowing.

Hence yen depreciation, as investors anticipate reduced rate increases by Japanese authorities relative to previous forecasts.

Japan’s government bond values have declined this session, lifting the return on long-term Japanese bonds near to record highs, due to forecasts of increased debt issuance and sustained inflationary pressures.

The markets will be calculating to what extent the new leader’s plans will echo the policies of Shinzo Abe advocated by ex-prime minister Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy during the party election, but many are aware her core beliefs and her appreciation of Abe’s Three Arrows philosophy.

Markets could then push to obtain clarity regarding her stance, and how much impact she could be in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: Eurozone construction PMI for September
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: BOE chief the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year