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Financial Market Response following Japan's Political Shift

Foreign exchange experts from leading banks have terminated their recommendations to hold a bullish stance regarding the Japanese yen following the country’s ruling party elected Sanae Takaichi as its head.

In commentary called “Getting out of the yen,” a chief of FX research stated:

We held a long yen position in our FX Blueprint but have closed this following the weekend’s election result. Sanae Takaichi’s surprise victory brings back renewed unpredictability concerning Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem for Japan, but questions are mounting on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance across Japan (where state authorities influence the BoJ’s moves) represent a downside risk.

Gold Closes In On the $4,000/oz Mark

Gold prices are reaching new all-time peaks, today, in its strongest year since the late 1970s.

The spot price of bullion has jumped more than 1 percent today reaching $3,944/oz, nearing the $4,000 threshold.

This shows the gold price has increased by 50% since January 1st, on track for its strongest yearly performance since the Iranian Revolution.

Bullion has advanced throughout the year because of various drivers, among them growing worries that public borrowing are unsustainable.

Takaichi’s success in the party vote is likely amplifying worries that government officials could seek to boost output via increased debt and lower interest rates, and depend on rising prices to erode the value of the resulting debt.

Trading Update

Japan’s stock market has rallied to unprecedented levels today, while the yen is plunging, following the leadership of the LDP was unexpectedly secured by fiscal dove Sanae Takaichi.

Predictions that the new leader is likely to be a PM favoring economic stimulus has ignited a wave of enthusiastic buying lifting Japan’s benchmark index up by 5%, adding 2315 points ending at 48,085 points.

But the yen is heading in the other direction – it has fallen about 2 percent against the US dollar at 150.3¥/$.

Takaichi, set to be the first woman to lead Japan later this month, has long admired of Thatcher. Yet even though she holds conservative views in social matters, Takaichi follows a contrasting path in economic policy, and has advocate a revival of government spending and accommodative central bank measures.

Consequently, markets predict to maintain Japan’s push to boost economic growth though fiscal spending and reduced borrowing costs, which would lead to increased price pressures and greater borrowing.

Thus the weaker yen, as investors anticipate less monetary tightening from the Bank of Japan relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, lifting the interest rate on long-term Japanese bonds close to record highs, due to forecasts of more government loans and lasting price increases.

Investors will be calculating how closely the new leader’s policies will mirror the policies of Shinzo Abe pushed by ex-prime minister Shinzo Abe.

One analyst explained:

In contrast to last year, she has not engaged from promoting Abenomics in this LDP leadership campaign, but experts understand her core beliefs and her appreciation of the former PM’s three-arrow approach.

Investors might thus seek for more information on her policies, 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...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: British construction figures for the last month
• 6:30 PM UK time: BOE chief Andrew Bailey to deliver address at an investment conference this year