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Financial Market Response to the Japanese Ruling Party Vote

Foreign exchange experts from leading banks have reportedly closed their strategies to hold a long position on the Japanese yen following the country’s governing party chose Sanae Takaichi to be its head.

In commentary named “Exiting the yen,” a chief for currency analysis explained:

We held a long yen position as part of our strategy but are now getting out after the party leadership vote. Takaichi’s unforeseen success creates renewed unpredictability concerning Japanese economic goals as well as the schedule for BoJ monetary tightening.

There is agreement that inflation is a problem for Japan, but doubts are resurfacing regarding how it will be addressed.

The analyst additionally noted indicators of government influence in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

Bullion values are hitting new all-time peaks, once more, in its strongest year since 1979.

The immediate value of bullion has surged by 1% or more today at $3,944 an ounce, nearing the $4000/oz mark.

This means gold’s value has increased fifty percent from the beginning of the year, likely to achieve its top annual returns in over 45 years.

Gold has been driven higher this year because of various drivers, such as growing worries that national debt levels are unsustainable.

Takaichi’s success in the party vote is likely amplifying apprehensions that government officials could seek to secure growth through higher borrowing and reduced rates, and rely on inflation to erode the value of accumulated debt.

Trading Update

Japan’s stock market has rallied to an all-time peak today, with the currency dropping, after the top position of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving Japan’s benchmark index to a 5% gain, as it gained over 2300 points to close at just over 48,000.

But the yen is trending the opposite way – it has fallen nearly two percent against the US dollar at 150.3¥/$.

The incoming leader, set to be the first woman to lead Japan in the coming weeks, is a long-time admirer of Margaret Thatcher. Yet even though she is conservative in social matters, the new leader adopts a different strategy in economic policy, and has advocate higher state investment and accommodative central bank measures.

As such, she’s expected to persist with the national effort to spur activity through public investment and reduced borrowing costs, which would lead to increased price pressures and increased borrowing.

Hence the falling currency, as investors anticipate reduced rate increases from the Bank of Japan than before.

Japanese long-term bond prices have declined this session, driving higher the yield on its 30-year debt approaching all-time highs, on expectations of increased debt issuance and more persistent inflation.

Traders are assessing to what extent Sanae Takaichi’s policies will echo the policies of Shinzo Abe advocated by former PM Shinzo Abe.

One analyst noted:

Different from previous comments, the leader has avoided from promoting Abenomics in the recent vote, but most know her underlying stance and her support of Shinzo Abe’s three-arrow philosophy.

Markets could then push to gain understanding regarding her stance, plus the degree of influence she may be in shaping monetary policy, with the Bank of Japan’s October session is viewed as a key event with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: BOE chief the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year