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Market Reactions to the Japanese Political Shift

FX analysts from prominent banks have exited their positions to hold a bullish stance regarding the Japanese yen after the country’s ruling party selected Takaichi as the new head.

In a report titled “Exiting the yen,” a chief for foreign exchange commented:

Our strategy was bullish on the yen in our FX Blueprint but have closed this due to the weekend’s election result. The unexpected win by Takaichi creates significant doubt regarding the nation’s policy focus as well as the schedule for BoJ monetary tightening.

Experts agree that inflation is a problem for Japan, but questions are mounting about the approach to managing it.

The expert additionally noted indicators of government influence in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Closes In On $4,000 per ounce Mark

The gold price are reaching new all-time peaks, again, in its top-performing period since 1979.

The immediate value of the precious metal has climbed more than 1 percent this morning reaching $3,944/oz, approaching the $4000/oz mark.

This shows gold’s value has jumped half again since January 1st, likely to achieve its top annual returns since the Iranian Revolution.

The metal has risen in recent months by several factors, including increasing fears that national debt levels are unsustainable.

Sanae Takaichi’s election win in the party vote is likely amplifying worries that leaders may try to secure growth by borrowing more and reduced rates, and depend on rising prices to diminish the worth of new borrowings.

Financial Summary

The Japanese equity market has rallied to an all-time peak this morning, while the yen is plunging, after the top position of the country’s ruling party was unexpectedly secured by stimulus supporter Takaichi.

Predictions that Sanae Takaichi will become a PM favoring economic stimulus has ignited a rush of positive investment lifting the Nikkei 225 share index up by 5%, adding over 2300 points to close at 48,085 points.

However, the currency is very much moving in the other direction – it dropped nearly two percent versus the dollar reaching 150.3 against the greenback.

Takaichi, set to be Japan’s first female prime minister soon, is a known fan of Margaret Thatcher. However, while she is conservative in social matters, she takes an un-Thatcherite approach on budget matters, and has advocate higher state investment and easy money policies.

Consequently, analysts anticipate to maintain Japan’s push to spur activity through public investment and cheap credit, likely resulting in higher inflation and increased borrowing.

Thus yen depreciation, as markets predict reduced rate increases from the Bank of Japan than before.

Japanese long-term bond prices have declined today, pushing up the interest rate on thirty-year bonds approaching peak levels, due to forecasts of more government loans and more persistent inflation.

Investors are assessing to what extent Sanae Takaichi’s plans will echo the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

A brokerage head explained:

Different from previous comments, Takaichi has refrained from promoting the three-arrow strategy in this LDP leadership campaign, but experts understand her fundamental position and her appreciation of Shinzo Abe’s Three Arrows approach.

Markets could then push to gain understanding regarding her stance, as well as exactly how influential she might become in forming the central bank’s decisions, given the October BoJ meeting is considered a “live” affair and a 25bp hike potentially on the table...

Market Agenda

• 8:30 AM UK time: Euro area building activity for September
• 9.30am BST: UK building sector data for the last month
• 18:30 BST: Central bank head Bailey to speak at an investment conference this year