🔗 Share this article

Market Reactions to the Japanese Leadership Election

FX analysts from major investment firms have exited their previous positions for holding an optimistic view regarding the yen following the country’s governing party elected Sanae Takaichi as the new chief.

In a note named “Exiting the yen,” a chief for currency analysis stated:

We went long JPY as part of our strategy but have now exited after the weekend’s election result. Sanae Takaichi’s surprise victory brings back too much uncertainty concerning Japanese economic goals as well as the schedule for BoJ monetary tightening.

Experts agree that inflation is a problem within the Japanese economy, but questions are mounting regarding how it will be addressed.

The analyst further cautioned that signs of fiscal dominance across Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

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

Gold prices are reaching unprecedented levels, once more, during its best performance in over four decades.

The immediate value of the precious metal has surged more than 1 percent in recent trading to $3,944 per ounce, nearing the $4,000 threshold.

This indicates gold’s value has surged fifty percent from the beginning of the year, on track for its top annual returns since the Iranian Revolution.

Gold has been driven higher in recent months due to multiple reasons, among them increasing fears that government debts are unsustainable.

Takaichi’s success in the Japanese election has further strengthened worries that leaders will attempt to secure growth by borrowing more and reduced 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 today, with the currency dropping, after the leadership of the country’s ruling party went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has sparked a wave of enthusiastic buying driving Japan’s benchmark index to a 5% gain, as it gained more than 2300 points to finish at 48,085 points.

But the yen is trending downward – it’s down almost 2% relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the first woman to lead Japan in the coming weeks, is a long-time admirer of Thatcher. Yet even though she is conservative regarding social issues, the new leader adopts a different strategy to fiscal policy, and supports higher state investment and easy money policies.

As such, she’s expected to continue Japan’s push to stimulate its economy though fiscal spending and lower interest rates, which would lead to increased price pressures and increased borrowing.

Hence the falling currency, as markets predict reduced rate increases by Japanese authorities than before.

Japanese long-term bond prices have declined in Monday trading, pushing up the yield on thirty-year bonds near to peak levels, due to forecasts of more government loans and lasting price increases.

Investors will be calculating to what extent Takaichi’s policies will echo the “Abenomics” programme pushed by previous leader Shinzo Abe.

A brokerage head explained:

Different from previous comments, she has not engaged from promoting Abenomics in this LDP leadership campaign, but experts understand her core beliefs and her approval of the former PM’s three-arrow approach.

Traders may therefore move to obtain clarity on that position, and how much impact she could be in forming the BoJ’s policy thinking, given the October BoJ meeting is viewed as a potential turning point with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: European construction data for the previous month
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: Central bank head Andrew Bailey to give keynote speech at a financial forum this year