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Financial Market Response following the Japanese Leadership Election

Currency strategists from major banks have reportedly exited their positions for holding an optimistic view on the yen after Japan’s ruling party chose Sanae Takaichi to be its head.

In commentary called “Leaving yen positions,” one chief for foreign exchange explained:

We held a long yen position within our portfolio but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success brings back renewed unpredictability around Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue for Japan, but questions are mounting about the approach to managing it.

The expert further cautioned that signs of fiscal dominance within Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Level

Gold prices are hitting fresh record highs, once more, in its strongest year in over four decades.

The spot price of bullion has surged by over 1% in recent trading reaching $3,944/oz, as it closes in on the $4000/oz mark.

This indicates the gold price has increased fifty percent since January 1st, heading for its best annual gains since the Iranian Revolution.

The metal has risen in recent months because of various drivers, such as growing worries that government debts cannot be maintained.

The new leader’s success in Japan is likely amplifying concerns that government officials may try to stimulate the economy via increased debt and reduced rates, and rely on inflation to reduce the real value of new borrowings.

Trading Update

The Japanese equity market has surged to unprecedented levels this morning, as the yen falls, following the top position of the country’s ruling party was unexpectedly secured by fiscal dove Sanae Takaichi.

Expectations that Sanae Takaichi will be a leader supporting government spending has sparked a rush of positive investment that has pushed Japan’s benchmark index up by 5%, adding 2315 points ending at 48,085.

Yet the Japanese yen is very much moving the opposite way – it has fallen nearly two percent against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, is a long-time admirer of Margaret Thatcher. Yet even though she holds conservative views on social policy, the new leader adopts a different strategy to fiscal policy, and has advocate increased public expenditure and accommodative central bank measures.

Consequently, markets predict to continue Japan’s push to stimulate its economy via government outlays and reduced borrowing costs, which would lead to higher inflation and increased borrowing.

Thus the weaker yen, with traders expecting reduced rate increases by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices have declined this session, driving higher the interest rate on its 30-year debt near to peak levels, due to forecasts of increased debt issuance and lasting price increases.

Investors are evaluating to what extent the new leader’s policies will mirror the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst noted:

Different from previous comments, the leader has avoided from promoting Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her approval of Shinzo Abe’s Three Arrows approach.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she may be in directing monetary policy, ahead of the BoJ’s next meeting is considered a “live” affair and a 25bp hike potentially on the table...

Market Agenda

• 8:30 AM UK time: Euro area building activity for the previous month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Bank of England governor Andrew Bailey to deliver address at an investment conference this year