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Market Reactions to the Japanese Leadership Election

Currency strategists from prominent financial institutions have reportedly terminated their positions to hold a bullish stance regarding the Japanese yen after the country’s leading political group selected Sanae Takaichi as its chief.

In commentary named “Leaving yen positions,” a lead strategist of FX research stated:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out following the weekend’s election result. The unexpected win by Takaichi reintroduces too much uncertainty concerning Japan’s policy priorities and the expected date of BoJ monetary tightening.

Experts agree that rising prices are an issue within the Japanese economy, but questions are mounting on how it will be dealt with.

The expert additionally noted evidence of political control within Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Approaches the $4,000/oz Threshold

Bullion values are reaching unprecedented levels, once more, in its top-performing period in over four decades.

The current price of bullion has surged by 1% or more this morning reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This means bullion prices has increased by 50% since January 1st, heading for its best annual gains in over 45 years.

Gold has been driven higher throughout the year by several factors, among them rising concerns that national debt levels are unsustainable.

Takaichi’s success in the party vote has further strengthened worries that government officials will attempt to secure growth via increased debt and reduced rates, and use inflation to erode the value of accumulated debt.

Trading Update

The Japanese equity market has surged to unprecedented levels in Monday trading, while the yen is plunging, following the top position of the country’s ruling party went unexpectedly to by spending advocate Sanae Takaichi.

Predictions that the new leader will be a pro-stimulus prime minister has ignited a rush of positive investment that has pushed Japan’s benchmark index up by 5%, rising by 2315 points to close at 48,085 points.

However, the currency is trending the opposite way – it’s down about 2 percent against the US dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. However, while she holds conservative views regarding social issues, she adopts a different strategy on budget matters, and promotes increased public expenditure and accommodative central bank measures.

Therefore, analysts anticipate to continue Japan’s push to stimulate its economy though fiscal spending and lower interest rates, likely resulting in increased price pressures and increased borrowing.

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

Japanese long-term bond prices are also down this session, pushing up the interest rate on thirty-year bonds close to record highs, because of predictions of higher borrowing and sustained inflationary pressures.

The markets are evaluating how closely the new leader’s proposals will mirror the “Abenomics” programme advocated by previous leader Shinzo Abe.

One analyst explained:

Different from previous comments, Takaichi has refrained from promoting Abenomics in the recent vote, but many are aware her underlying stance and her support of Abe’s Three Arrows strategy.

Traders may therefore move to gain understanding regarding her stance, plus the degree of influence she might become in forming the BoJ’s policy thinking, given the October BoJ meeting is viewed as a potential turning point and a 25bp hike considered likely...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for the previous month
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: Central bank head Bailey to give keynote speech at a financial forum this year