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Market Reactions to Japan's Leadership Election

FX analysts at leading investment firms have exited their previous recommendations for holding a long position regarding the yen after the country’s governing party selected Sanae Takaichi as the new head.

In a report named “Getting out of the yen,” a chief for currency analysis explained:

We went long JPY in our FX Blueprint but have closed this due to the party leadership vote. The unexpected win by Takaichi creates renewed unpredictability concerning Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Experts agree that inflationary pressures exist within the Japanese economy, but uncertainty is now going up again on how it will be dealt with.

The analyst further cautioned evidence of political control within Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000/oz Mark

Gold prices are reaching fresh record highs, today, in its top-performing period since 1979.

The current price of bullion has climbed by 1% or more today reaching $3,944/oz, as it closes in on the $4000/oz mark.

This shows the gold price has surged half again since January 1st, on track for its top annual returns in over 45 years.

Bullion has advanced in recent months because of various drivers, among them rising concerns that government debts cannot be maintained.

The new leader’s victory in Japan is likely amplifying concerns that leaders will attempt to stimulate the economy through higher borrowing and cheaper credit, and rely on inflation to reduce the real value of new borrowings.

Market Overview

Japan’s stock market has jumped to an all-time peak this morning, as the yen falls, after the chief role of the country’s ruling party was unexpectedly secured by spending advocate Sanae Takaichi.

Predictions that the new leader will be a PM favoring economic stimulus has sparked a wave of enthusiastic buying that has pushed Japan’s benchmark index higher by five percent, as it gained over 2300 points to finish at just over 48,000.

But the yen is trending the opposite way – it dropped about 2 percent versus the dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be the nation’s initial woman PM later this month, is a long-time admirer of Thatcher. However, while her social policies are right-leaning on social policy, Takaichi adopts a different strategy on budget matters, and has advocate higher state investment and easy money policies.

As such, she’s expected to maintain Japan’s push to spur activity via government outlays and lower interest rates, likely resulting in rising inflation and increased borrowing.

Hence the weaker yen, with traders expecting less monetary tightening by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices are also down this session, pushing up the interest rate on its 30-year debt near to record highs, due to forecasts of higher borrowing and lasting price increases.

The markets will be calculating the degree to which Sanae Takaichi’s proposals will mirror the policies of Shinzo Abe pushed by ex-prime minister Shinzo Abe.

A brokerage head noted:

Different from previous comments, Takaichi has refrained from promoting the Abenomics program in the recent vote, but most know her core beliefs and her approval of Abe’s Three Arrows strategy.

Investors might thus seek for more information regarding her stance, as well as exactly how influential she may be in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase considered likely...

Economic Calendar

• 8:30 AM UK time: Eurozone construction PMI for last month
• 09:30 BST: UK building sector data for September
• 18:30 BST: Central bank head Andrew Bailey to speak at a financial forum this year