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Financial Market Response following the Japanese Political Shift

Currency strategists at prominent banks have exited their previous strategies to hold a bullish stance regarding the yen after Japan’s ruling party selected Sanae Takaichi as its leader.

In commentary called “Getting out of the yen,” a chief for currency analysis commented:

Our strategy was bullish on the yen within our portfolio but are now getting out following the party leadership vote. Takaichi’s unforeseen success creates significant doubt around Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist for Japan, but questions are mounting about the approach to managing it.

The analyst additionally noted indicators of government influence within Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

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

Gold prices are hitting new all-time peaks, once more, in its top-performing period since the late 1970s.

The immediate value of the precious metal has climbed by 1% or more in recent trading reaching $3,944/oz, approaching the $4,000 threshold.

This indicates gold’s value has increased by 50% since the start of January, on track for its top annual returns since the late 1970s.

Bullion has advanced this year because of various drivers, among them growing worries that national debt levels may be unmanageable.

The new leader’s victory in the Japanese election is likely amplifying worries that politicians may try to secure growth by borrowing more and lower interest rates, and depend on rising prices to reduce the real value of new borrowings.

Trading Update

Tokyo’s bourse has rallied to a record high today, with the currency dropping, following the top position of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that the new leader is likely to be a PM favoring economic stimulus has triggered a surge of optimistic trading that has pushed Japan’s benchmark index to a 5% gain, rising by more than 2300 points to finish at 48,085.

However, the currency is trending downward – it has fallen about 2 percent relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the first woman to lead Japan in the coming weeks, has long admired of Margaret Thatcher. However, while her social policies are right-leaning in social matters, she adopts a different strategy to fiscal policy, and supports higher state investment and loose monetary policy.

As such, markets predict to continue the country’s drive to boost economic growth though fiscal spending and cheap credit, potentially causing increased price pressures and more debt.

Hence the falling currency, as markets predict fewer interest rates hikes from the Bank of Japan than before.

Japanese long-term bond prices have also fallen this session, lifting the yield on long-term Japanese bonds near to peak levels, because of predictions of more government loans and sustained inflationary pressures.

Investors are evaluating how closely Sanae Takaichi’s policies will echo the “Abenomics” programme pushed by ex-prime minister Shinzo Abe.

One analyst noted:

In contrast to last year, she has not engaged from promoting Abenomics in the recent vote, but experts understand her underlying stance and her appreciation of Abe’s three-arrow strategy.

Traders may therefore move to obtain clarity regarding her stance, and how much impact she could be in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a key event with a quarter-point increase considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for the last month
• 6:30 PM UK time: BOE chief the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year