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Financial Market Response to the Japanese Ruling Party Vote

Currency strategists from leading financial institutions have reportedly exited their previous strategies to hold a long position on Japan’s currency after Japan’s leading political group elected Sanae Takaichi to be its leader.

In a report named “Exiting the yen,” a lead strategist for currency analysis stated:

Our strategy was bullish on the yen in our FX Blueprint but have now exited due to the LDP election outcome. Takaichi’s unforeseen success reintroduces too much uncertainty around the nation’s policy focus and the timing of BoJ monetary tightening.

Analysts concur that inflation is a problem within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The analyst also warned that signs of fiscal dominance within Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

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

Gold prices are hitting new all-time peaks, today, during its best performance since 1979.

The immediate value of bullion has jumped more than 1 percent this morning at $3,944 an ounce, approaching the $4000/oz mark.

This means gold’s value has increased fifty percent since the start of January, heading for its strongest yearly performance since the late 1970s.

The metal has risen in recent months due to multiple reasons, including increasing fears that government debts cannot be maintained.

The new leader’s election win in the Japanese election is likely amplifying apprehensions that leaders will attempt to stimulate the economy via increased debt and cheaper credit, and depend on rising prices to erode the value of new borrowings.

Trading Update

The Japanese equity market has jumped to an all-time peak in Monday trading, while the yen is plunging, following the leadership of the governing party was unexpectedly secured by fiscal dove Sanae Takaichi.

Predictions that Takaichi will become a leader supporting government spending has ignited a rush of positive investment driving Japan’s benchmark index to a 5% gain, as it gained more than 2300 points to finish at 48,085 points.

Yet the Japanese yen is very much moving downward – it has fallen nearly two percent against the US dollar at 150.3¥/$.

The incoming leader, who should become the nation’s initial woman PM in the coming weeks, is a known fan of Thatcher. Yet even though she is conservative regarding social issues, the new leader takes an un-Thatcherite approach on budget matters, and has advocate a revival of government spending and accommodative central bank measures.

Consequently, analysts anticipate to maintain the country’s drive to spur activity though fiscal spending and cheap credit, which would lead to higher inflation and more debt.

As a result the falling currency, as markets predict reduced rate increases by Japanese authorities than before.

Japan’s government bond values are also down in Monday trading, pushing up the interest rate on long-term Japanese bonds near to all-time highs, because of predictions of more government loans and sustained inflationary pressures.

The markets are assessing the degree to which Sanae Takaichi’s policies will mirror the Abenomics strategy advocated by previous leader Shinzo Abe.

One analyst commented:

In contrast to last year, Takaichi has refrained from talking up Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her appreciation of the former PM’s Three Arrows philosophy.

Investors might thus seek for more information regarding her stance, plus the degree of influence she may be in directing monetary policy, ahead of the BoJ’s next meeting is considered a potential turning point and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 09:30 BST: UK construction PMI for the last month
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to give keynote speech at an investment conference this year