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Market Reactions following Japan's Political Shift

Foreign exchange experts at leading banks have reportedly exited their recommendations to hold a bullish stance on the yen following the country’s leading political group chose Sanae Takaichi to be its chief.

In commentary called “Leaving yen positions,” one chief for foreign exchange stated:

We went long JPY within our portfolio but are now getting out following the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty around Japanese economic goals and the expected date of BoJ monetary tightening.

Experts agree that rising prices are an issue within the Japanese economy, but uncertainty is now going up again regarding how it will be addressed.

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

Gold Closes In On the $4,000 Mark

The gold price are hitting new all-time peaks, today, in its top-performing period in over four decades.

The spot price of the precious metal has surged by over 1% today to $3,944 per ounce, approaching the $4000/oz mark.

This means the gold price has increased by 50% since January 1st, heading for its best annual gains in over 45 years.

The metal has risen this year due to multiple reasons, among them rising concerns that public borrowing cannot be maintained.

The new leader’s election win in the Japanese election is likely amplifying worries that politicians could seek to boost output through higher borrowing and reduced rates, and rely on inflation to diminish the worth of the resulting debt.

Financial Summary

Japan’s stock market has rallied to an all-time peak today, while the yen is plunging, following the leadership of the governing party was unexpectedly secured by fiscal dove Sanae Takaichi.

Expectations that Takaichi is likely to be a PM favoring economic stimulus has ignited a surge of optimistic trading driving the Tokyo stock index higher by five percent, rising by more than 2300 points to close at just over 48,000.

Yet the Japanese yen is trending the opposite way – it dropped almost 2% relative to the USD at 150.3¥/$.

Takaichi, who should become Japan’s first female prime minister in the coming weeks, is a long-time admirer of the former UK leader. But although she holds conservative views regarding social issues, Takaichi adopts a different strategy in economic policy, and promotes a revival of government spending and loose monetary policy.

As such, she’s expected to persist with the country’s drive to spur activity though fiscal spending and reduced borrowing costs, likely resulting in higher inflation and greater borrowing.

Hence the falling currency, with traders expecting reduced rate increases in Tokyo compared to earlier expectations.

Japanese long-term bond prices have also fallen in Monday trading, driving higher the yield on long-term Japanese bonds near to record highs, on expectations of higher borrowing and lasting price increases.

Traders are assessing how closely Sanae Takaichi’s plans will mirror the policies of Shinzo Abe pushed by ex-prime minister Abe.

A brokerage head commented:

In contrast to last year, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but most know her underlying stance and her support of the former PM’s three-pillar strategy.

Markets could then push to gain understanding on her policies, plus the degree of influence she might become in directing the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a “live” affair and a rate rise potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 9.30am BST: UK construction PMI for September
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit this year