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Financial Market Response to the Japanese Ruling Party Vote

FX analysts at major financial institutions have exited their recommendations to hold a long position on the Japanese yen after Japan’s governing party selected Sanae Takaichi as the new head.

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

We went long JPY as part of our strategy but have closed this due to the party leadership vote. The unexpected win by Takaichi brings back significant doubt around Japanese economic goals and the timing of BoJ monetary tightening.

There is agreement that inflation is a problem within the Japanese economy, but questions are mounting on how it will be dealt with.

The strategist additionally noted that signs of fiscal dominance within Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000/oz Level

Gold prices are hitting new all-time peaks, again, in its strongest year since 1979.

The current price of gold has jumped more than 1 percent in recent trading at $3,944 an ounce, approaching the $4,000 threshold.

This indicates the gold price has jumped by 50% since January 1st, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen this year because of various drivers, such as increasing fears that national debt levels may be unmanageable.

The new leader’s election win in the Japanese election has further strengthened apprehensions that government officials could seek to boost output via increased debt and lower interest rates, and rely on inflation to diminish the worth of the resulting debt.

Financial Summary

Japan’s stock market has jumped to an all-time peak in Monday trading, with the currency dropping, after the chief role of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi will be a PM favoring economic stimulus has ignited a surge of optimistic trading that has pushed Japan’s benchmark index to a 5% gain, adding more than 2300 points to close at 48,085 points.

However, the currency is heading the opposite way – it’s down nearly two percent relative to the USD at 150.3¥/$.

Sanae Takaichi, set to be the first woman to lead Japan later this month, has long admired of Margaret Thatcher. But although she holds conservative views regarding social issues, she follows a contrasting path in economic policy, and has advocate a revival of government spending and loose monetary policy.

As such, markets predict to persist with the country’s drive to boost economic growth though fiscal spending and lower interest rates, likely resulting in rising inflation and more debt.

As a result the falling currency, with traders expecting less monetary tightening from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen today, driving higher the interest rate on thirty-year bonds approaching all-time highs, due to forecasts of increased debt issuance and sustained inflationary pressures.

Investors are assessing to what extent Sanae Takaichi’s policies will echo the Abenomics strategy pushed by former PM Abe.

A brokerage head commented:

In contrast to last year, Takaichi has refrained from highlighting the three-arrow strategy during the party election, but most know her underlying stance and her appreciation of Abe’s three-arrow strategy.

Traders may therefore move to obtain clarity on her policies, as well as exactly how influential she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a key event and a rate rise seen as a real possibility...

Market Agenda

• 8.30am BST: Eurozone construction PMI for the previous month
• 9.30am BST: UK building sector data for the last month
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to speak at an investment conference this year