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Financial Market Response to Japan's Political Shift

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

In a note titled “Leaving yen positions,” one chief for currency analysis stated:

We held a long yen position in our FX Blueprint but have now exited following the weekend’s election result. Takaichi’s unforeseen success reintroduces significant doubt around Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem in Japan, but uncertainty is now going up again on how it will be dealt with.

The expert further cautioned indicators of government influence across Japan (where state authorities influence the central bank’s actions) represent a downside risk.

Gold Closes In On $4,000 per ounce Mark

Gold prices are achieving fresh record highs, today, in its top-performing period in over four decades.

The immediate value of gold has climbed by over 1% today reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows bullion prices has increased fifty percent since January 1st, heading for its strongest yearly performance since the late 1970s.

Gold has been driven higher this year due to multiple reasons, including rising concerns that public borrowing are unsustainable.

The new leader’s election win in the party vote has further strengthened concerns that politicians could seek to stimulate the economy through higher borrowing and reduced rates, and rely on inflation to reduce the real value of new borrowings.

Financial Summary

Japan’s stock market has rallied to an all-time peak today, while the yen is plunging, following the leadership of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Predictions that Takaichi will become a pro-stimulus prime minister has triggered a rush of positive investment driving the Tokyo stock index higher by five percent, as it gained more than 2300 points to close at 48,085.

But the yen is heading downward – it’s down about 2 percent versus the dollar at 150.3¥/$.

Sanae Takaichi, who should become the nation’s initial woman PM in the coming weeks, is a long-time admirer of Thatcher. However, while her social policies are right-leaning on social policy, she follows a contrasting path to fiscal policy, and promotes increased public expenditure and loose monetary policy.

Therefore, she’s expected to persist with Japan’s push to boost economic growth though fiscal spending and lower interest rates, which would lead to higher inflation and greater borrowing.

Hence the weaker yen, as markets predict reduced rate increases from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined today, driving higher the yield on thirty-year bonds approaching all-time highs, due to forecasts of increased debt issuance and more persistent inflation.

Investors will be calculating to what extent the new leader’s policies will echo the Abenomics strategy pushed by previous leader Shinzo Abe.

A brokerage head noted:

In contrast to last year, Takaichi has refrained from promoting the three-arrow strategy in this LDP leadership campaign, but most know her underlying stance and her approval of Shinzo Abe’s three-pillar philosophy.

Markets could then push for more information regarding her stance, as well as exactly how influential she might become in directing the BoJ’s policy thinking, given the October BoJ meeting is seen as a potential turning point and a rate rise considered likely...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for last month
• 9.30am BST: UK building sector data for September
• 18:30 BST: Bank of England governor Bailey to speak at a financial forum this year