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Market Reactions following the Japanese Ruling Party Vote

Currency strategists from major investment firms have reportedly closed their recommendations to hold a bullish stance regarding the Japanese yen following the country’s governing party chose Sanae Takaichi as the new leader.

In a note called “Getting out of the yen,” a lead strategist for currency analysis explained:

We held a long yen position as part of our strategy but are now getting out following the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty concerning Japanese economic goals as well as the schedule for BoJ monetary tightening.

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

The analyst also warned indicators of government influence across Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Nears the $4,000 Threshold

Gold prices are reaching unprecedented levels, today, during its best performance since the late 1970s.

The immediate value of gold has surged by 1% or more this morning to $3,944 per ounce, nearing the $4000/oz mark.

This indicates the gold price has surged half again since January 1st, heading for its strongest yearly performance in over 45 years.

The metal has risen throughout the year because of various drivers, including growing worries that public borrowing may be unmanageable.

The new leader’s success in Japan will only have reinforced concerns that leaders will attempt to secure growth through higher borrowing and reduced rates, and depend on rising prices to reduce the real value of accumulated debt.

Trading Update

Tokyo’s bourse has jumped to an all-time peak this morning, with the currency dropping, after the leadership of the LDP was surprisingly won by stimulus supporter Sanae Takaichi.

Forecasts that Sanae Takaichi will become a PM favoring economic stimulus has triggered a rush of positive investment driving the Tokyo stock index higher by five percent, adding more than 2300 points ending at just over 48,000.

Yet the Japanese yen is heading in the other direction – it dropped nearly two percent relative to the USD reaching 150.3 against the greenback.

The incoming leader, who should become the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. Yet even though she is conservative regarding social issues, the new leader follows a contrasting path in economic policy, and supports higher state investment and easy money policies.

As such, she’s expected to persist with Japan’s push to stimulate its economy via government outlays and reduced borrowing costs, potentially causing higher inflation and increased borrowing.

Thus yen depreciation, as markets predict reduced rate increases in Tokyo relative to previous forecasts.

Japanese long-term bond prices have declined in Monday trading, pushing up the return on long-term Japanese bonds close to record highs, because of predictions of higher borrowing and sustained inflationary pressures.

The markets will be calculating how closely the new leader’s proposals will mirror the Abenomics strategy pushed by previous leader Shinzo Abe.

One analyst explained:

In contrast to last year, the leader has avoided from promoting the Abenomics program in this LDP leadership campaign, but most know her underlying stance and her approval of the former PM’s Three Arrows philosophy.

Investors might thus seek for more information on her policies, plus the degree of influence she could be in shaping monetary policy, with the Bank of Japan’s October session is considered a potential turning point and a 25bp hike seen as a real possibility...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for the last month
• 6.30pm BST: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit this year