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Financial Market Response to the Japanese Political Shift

Currency strategists from major financial institutions have terminated their strategies for holding a bullish stance on the yen after the country’s ruling party selected Sanae Takaichi to be its leader.

In a note named “Exiting the yen,” one global head of FX research stated:

We went long JPY in our FX Blueprint but have closed this after the party leadership vote. The unexpected win by Takaichi creates too much uncertainty around Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue in Japan, but questions are mounting regarding how it will be addressed.

The expert 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 Mark

The gold price are achieving unprecedented levels, today, in its strongest year in over four decades.

The spot price of bullion has surged by over 1% in recent trading to $3,944 per ounce, as it closes in on the $4,000 threshold.

This means the gold price has jumped by 50% since the start of January, likely to achieve its best annual gains since the late 1970s.

The metal has risen throughout the year because of various drivers, including growing worries that national debt levels may be unmanageable.

The new leader’s victory in the party vote is likely amplifying worries that politicians will attempt to stimulate the economy via increased debt and cheaper credit, and rely on inflation to erode the value of the resulting debt.

Market Overview

The Japanese equity market has surged to a record high in Monday trading, as the yen falls, after the leadership of the LDP was surprisingly won by spending advocate Takaichi.

Predictions that Takaichi will be a pro-stimulus prime minister has ignited a wave of enthusiastic buying driving the Nikkei 225 share index to a 5% gain, adding 2315 points ending at 48,085 points.

Yet the Japanese yen is heading downward – it has fallen about 2 percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, who should become the nation’s initial woman PM soon, is a known fan of the former UK leader. But although her social policies are right-leaning regarding social issues, the new leader adopts a different strategy on budget matters, and promotes higher state investment and accommodative central bank measures.

As such, markets predict to continue the national effort to boost economic growth though fiscal spending and cheap credit, which would lead to increased price pressures and increased borrowing.

As a result the weaker yen, with traders expecting fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities are also down this session, pushing up the return on its 30-year debt approaching all-time highs, due to forecasts of more government loans and lasting price increases.

Investors are assessing to what extent Takaichi’s plans will echo the “Abenomics” programme advocated by ex-prime minister Shinzo Abe.

One analyst commented:

Different from previous comments, the leader has avoided from highlighting the three-arrow strategy during the party election, but many are aware her fundamental position and her approval of the former PM’s three-arrow approach.

Markets could then push for more information on her policies, as well as exactly how influential she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is considered a “live” affair with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for September
• 09:30 BST: UK building sector data for the last month
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year