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Market Reactions following the Japanese Political Shift

FX analysts from prominent banks have reportedly exited their previous positions to hold a bullish stance on the yen after the country’s leading political group selected Sanae Takaichi as its chief.

In commentary called “Exiting the yen,” one lead strategist for currency analysis stated:

We held a long yen position in our FX Blueprint but have closed this after the weekend’s election result. The unexpected win by Takaichi brings back 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 for Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Nears the $4,000/oz Mark

The gold price are hitting fresh record highs, today, in its strongest year since the late 1970s.

The current price of bullion has surged by 1% or more today to $3,944 per ounce, approaching the $4000/oz mark.

This means gold’s value has increased by 50% from the beginning of the year, on track for its top annual returns since the late 1970s.

The metal has risen this year by several factors, including growing worries that public borrowing may be unmanageable.

Takaichi’s election win in the party vote will only have reinforced apprehensions that politicians will attempt to secure growth via increased debt and reduced rates, and depend on rising prices to diminish the worth of the resulting debt.

Trading Update

Japan’s stock market has jumped to an all-time peak this morning, with the currency dropping, after the leadership of the country’s ruling party went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that the new leader will become a pro-stimulus prime minister has sparked a rush of positive investment driving the Tokyo stock index up by 5%, adding 2315 points to finish at 48,085 points.

But the yen is heading in the other direction – it has fallen about 2 percent versus the dollar at 150.3¥/$.

The incoming leader, who is expected to become Japan’s first female prime minister in the coming weeks, is a long-time admirer of the former UK leader. Yet even though her social policies are right-leaning regarding social issues, she takes an un-Thatcherite approach to fiscal policy, and has advocate increased public expenditure and easy money policies.

Therefore, she’s expected to continue the national effort to boost economic growth via government outlays and cheap credit, which would lead to rising inflation and increased borrowing.

Thus yen depreciation, as markets predict less monetary tightening by Japanese authorities compared to earlier expectations.

Japan’s government bond values have declined in Monday trading, pushing up the return on its 30-year debt approaching peak levels, because of predictions of increased debt issuance and more persistent inflation.

Investors will be calculating the degree to which Takaichi’s proposals will echo the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst commented:

In contrast to last year, she has not engaged from highlighting the Abenomics program in the recent vote, but most know her underlying stance and her support of the former PM’s three-arrow philosophy.

Markets could then push to gain understanding on her policies, as well as exactly how influential she may be in directing monetary policy, with the Bank of Japan’s October session is seen as a potential turning point and a rate rise considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for the previous month
• 9:30 AM UK time: British construction figures for the last month
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to deliver address at a financial forum this year