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Financial Market Response to the Japanese Ruling Party Vote

Foreign exchange experts at prominent financial institutions have terminated their previous strategies to hold a bullish stance regarding Japan’s currency following the country’s leading political group selected Takaichi as its chief.

In a note titled “Leaving yen positions,” one global head for foreign exchange explained:

We went long JPY within our portfolio but have closed this due to the party leadership vote. The unexpected win by Takaichi reintroduces too much uncertainty concerning Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflation is a problem for Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst also warned indicators of government influence in Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Nears the $4,000 Threshold

Bullion values are reaching new all-time peaks, once more, during its best performance in over four decades.

The immediate value of gold has surged more than 1 percent in recent trading to $3,944 per ounce, nearing the $4000/oz mark.

This shows the gold price has surged by 50% since January 1st, likely to achieve its top annual returns in over 45 years.

Gold has been driven higher this year due to multiple reasons, among them increasing fears that national debt levels cannot be maintained.

Sanae Takaichi’s victory in Japan has further strengthened worries that government officials may try to secure growth via increased debt and lower interest rates, and rely on inflation to reduce the real value of the resulting debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak this morning, while the yen is plunging, following the chief role of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that Takaichi will be a leader supporting government spending has ignited a rush of positive investment driving the Tokyo stock index higher by five percent, adding over 2300 points to close at 48,085 points.

However, the currency is heading downward – it has fallen nearly two percent relative to the USD reaching 150.3 against the greenback.

Sanae Takaichi, who is expected to become Japan’s first female prime minister later this month, is a known fan of the former UK leader. However, while she is conservative in social matters, Takaichi takes an un-Thatcherite approach in economic policy, and promotes a revival of government spending and loose monetary policy.

Therefore, analysts anticipate to persist with the country’s drive to boost economic growth through public investment and cheap credit, potentially causing higher inflation and more debt.

Hence the weaker yen, as markets predict less monetary tightening in Tokyo relative to previous forecasts.

Japanese long-term bond prices have also fallen in Monday trading, pushing up the return on long-term Japanese bonds close to record highs, because of predictions of increased debt issuance and more persistent inflation.

Traders are evaluating how closely Sanae Takaichi’s proposals will mirror the policies of Shinzo Abe advocated by previous leader Shinzo Abe.

A market expert commented:

In contrast to last year, the leader has avoided from talking up the three-arrow strategy in the recent vote, but experts understand her fundamental position and her appreciation of the former PM’s three-pillar strategy.

Traders may therefore move for more information regarding her stance, as well as exactly how influential she might become in directing monetary policy, with the Bank of Japan’s October session is considered a potential turning point and a 25bp hike potentially on the table...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for September
• 9:30 AM UK time: British construction figures for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to deliver address at a financial forum this year