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Financial Market Response following the Japanese Political Shift

FX analysts at major investment firms have reportedly closed their strategies for holding a bullish stance regarding the Japanese yen following the country’s leading political group elected Takaichi as its chief.

In a note titled “Leaving yen positions,” one lead strategist of FX research explained:

We went long JPY in our FX Blueprint but have closed this due to the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability concerning the nation’s policy focus and the timing of BoJ monetary tightening.

Experts agree that rising prices are an issue for Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance across Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

Gold Nears the $4,000 Mark

Gold prices are hitting fresh record highs, again, during its best performance since the late 1970s.

The spot price of bullion has climbed by 1% or more this morning reaching $3,944/oz, approaching the $4,000 per ounce level.

This indicates bullion prices has increased half again since January 1st, likely to achieve its top annual returns since the Iranian Revolution.

The metal has risen this year by several factors, including increasing fears that national debt levels cannot be maintained.

The new leader’s victory in the party vote will only have reinforced worries that leaders could seek to stimulate the economy by borrowing more and reduced rates, and rely on inflation to diminish the worth of new borrowings.

Market Overview

The Japanese equity market has surged to a record high this morning, while the yen is plunging, after the top position of the governing party was unexpectedly secured by fiscal dove Takaichi.

Expectations that Sanae Takaichi will be a pro-stimulus prime minister has ignited a wave of enthusiastic buying lifting Japan’s benchmark index up by 5%, as it gained 2315 points ending at 48,085.

However, the currency is heading the opposite way – it’s down about 2 percent relative to the USD reaching 150.3 against the greenback.

The incoming leader, set to be the first woman to lead Japan later this month, is a known fan of Margaret Thatcher. However, while she holds conservative views on social policy, Takaichi follows a contrasting path in economic policy, and has advocate a revival of government spending and easy money policies.

Consequently, analysts anticipate to maintain the country’s drive to stimulate its economy via government outlays and cheap credit, likely resulting in increased price pressures and greater borrowing.

Hence the falling currency, with traders expecting fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities are also down in Monday trading, lifting the yield on its 30-year debt approaching peak levels, due to forecasts of more government loans and sustained inflationary pressures.

The markets are evaluating to what extent Sanae Takaichi’s policies will resemble the policies of Shinzo Abe implemented by previous leader Abe.

A brokerage head explained:

In contrast to last year, Takaichi has refrained from promoting the Abenomics program in this LDP leadership campaign, but most know her fundamental position and her appreciation of the former PM’s three-pillar strategy.

Markets could then push to obtain clarity on that position, plus the degree of influence she could be in shaping the central bank’s decisions, given the October BoJ meeting is viewed as a key event and a rate rise considered likely...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for last month
• 9.30am BST: UK construction PMI for September
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to give keynote speech at a financial forum this year