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Investor Sentiment following the Japanese Leadership Election

FX analysts at major banks have closed their previous positions to hold a long position regarding Japan’s currency after the country’s governing party elected Takaichi as its leader.

In a report called “Exiting the yen,” one global head of FX research commented:

We went long JPY as part of our strategy but have closed this due to the LDP election outcome. Sanae Takaichi’s surprise victory creates too much uncertainty concerning Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The expert additionally noted evidence of political control across Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000 Mark

Gold prices are reaching fresh record highs, today, during its best performance since 1979.

The current price of gold has surged by over 1% today at $3,944 an ounce, approaching the $4,000 threshold.

This means gold’s value has jumped by 50% from the beginning of the year, likely to achieve its top annual returns since the late 1970s.

Bullion has advanced in recent months due to multiple reasons, among them rising concerns that government debts cannot be maintained.

Sanae Takaichi’s election win in the party vote has further strengthened concerns that leaders will attempt to secure growth via increased debt and lower interest rates, and rely on inflation to reduce the real value of accumulated debt.

Market Overview

The Japanese equity market has surged to an all-time peak this morning, as the yen falls, after the chief role of the governing party went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi will be a leader supporting government spending has sparked a surge of optimistic trading lifting the Tokyo stock index to a 5% gain, rising by more than 2300 points ending at 48,085.

Yet the Japanese yen is very much moving downward – it has fallen nearly two percent relative to the USD at 150.3¥/$.

Takaichi, set to be the nation’s initial woman PM later this month, has long admired of the former UK leader. But although her social policies are right-leaning on social policy, Takaichi takes an un-Thatcherite approach to fiscal policy, and promotes a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to continue the national effort to spur activity via government outlays and reduced borrowing costs, which would lead to rising inflation and greater borrowing.

Thus yen depreciation, as markets predict reduced rate increases from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices have declined in Monday trading, driving higher the yield on thirty-year bonds near to all-time highs, because of predictions of higher borrowing and more persistent inflation.

The markets are assessing to what extent the new leader’s proposals will echo the policies of Shinzo Abe advocated by ex-prime minister Abe.

A market expert commented:

Different from previous comments, the leader has avoided from talking up the Abenomics program during the party election, but experts understand her underlying stance and her approval of Shinzo Abe’s three-pillar strategy.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she may be in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is considered a key event and a rate rise considered likely...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 09:30 BST: UK construction PMI for September
• 18:30 BST: BOE chief Bailey to deliver address at Scotland’s Global Investment Summit this year