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Financial Market Response to the Japanese Leadership Election

Currency strategists from leading investment firms have reportedly closed their strategies to hold a bullish stance regarding Japan’s currency after Japan’s ruling party chose Takaichi as its leader.

In a note titled “Leaving yen positions,” one lead strategist for foreign exchange stated:

Our strategy was bullish on the yen in our FX Blueprint but have closed this following the party leadership vote. Sanae Takaichi’s surprise victory creates too much uncertainty around Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

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

The strategist additionally noted evidence of political control in Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches $4,000 per ounce Threshold

The gold price are hitting unprecedented levels, once more, during its best performance since the late 1970s.

The spot price of the precious metal has climbed more than 1 percent this morning reaching $3,944/oz, nearing the $4000/oz mark.

This indicates bullion prices has jumped by 50% from the beginning of the year, on track for its best annual gains since the late 1970s.

Gold has been driven higher this year due to multiple reasons, such as growing worries that public borrowing cannot be maintained.

Takaichi’s success in Japan is likely amplifying concerns that government officials will attempt to secure growth via increased debt and reduced rates, and depend on rising prices to erode the value of new borrowings.

Market Overview

Japan’s stock market has rallied to unprecedented levels today, with the currency dropping, after the chief role of the LDP was surprisingly won by stimulus supporter Sanae Takaichi.

Expectations that the new leader is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying that has pushed the Tokyo stock index to a 5% gain, rising by 2315 points to finish at 48,085 points.

But the yen is trending in the other direction – it has fallen almost 2% against the US dollar at 150.3¥/$.

Sanae Takaichi, who should become Japan’s first female prime minister soon, has long admired of the former UK leader. Yet even though her social policies are right-leaning in social matters, she follows a contrasting path in economic policy, and supports increased public expenditure and easy money policies.

Therefore, analysts anticipate to maintain the country’s drive to spur activity through public investment and reduced borrowing costs, likely resulting in rising inflation and greater borrowing.

As a result the weaker yen, as markets predict fewer interest rates hikes from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices are also down today, lifting the yield on its 30-year debt close to peak levels, because of predictions of higher borrowing and lasting price increases.

Traders are evaluating how closely the new leader’s policies will mirror the “Abenomics” programme pushed by previous leader Shinzo Abe.

A brokerage head commented:

Different from previous comments, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but many are aware her fundamental position and her support of Shinzo Abe’s three-pillar philosophy.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she could be in directing monetary policy, given the October BoJ meeting is considered a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: Euro area building activity for September
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: Central bank head Bailey to give keynote speech at Scotland’s Global Investment Summit this year