🔗 Share this article

Market Reactions to Japan's Political Shift

Currency strategists from leading investment firms have closed their previous positions to hold a bullish stance regarding the Japanese yen after the country’s ruling party selected Takaichi as the new leader.

In a report called “Getting out of the yen,” a global head for foreign exchange explained:

Our strategy was bullish on the yen as part of our strategy but have now exited due to the party leadership vote. Takaichi’s unforeseen success brings back too much uncertainty regarding Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist in Japan, but uncertainty is now going up again on how it will be dealt with.

The strategist also warned that signs of fiscal dominance in Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Nears the $4,000 Threshold

Gold prices are achieving fresh record highs, again, in its strongest year since 1979.

The spot price of gold has jumped by 1% or more today to $3,944 per ounce, approaching the $4000/oz mark.

This indicates gold’s value has surged fifty percent from the beginning of the year, heading for its strongest yearly performance since the late 1970s.

The metal has risen throughout the year because of various drivers, including rising concerns that national debt levels may be unmanageable.

The new leader’s success in the party vote is likely amplifying worries that government officials will attempt to stimulate the economy via increased debt and reduced rates, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has surged to an all-time peak in Monday trading, as the yen falls, after the top position of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying lifting the Nikkei 225 share index higher by five percent, as it gained 2315 points ending at 48,085 points.

However, the currency is very much moving in the other direction – it has fallen almost 2% versus the dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan later this month, is a long-time admirer of Thatcher. Yet even though her social policies are right-leaning regarding social issues, Takaichi takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and accommodative central bank measures.

Therefore, she’s expected to persist with the national effort to boost economic growth via government outlays and lower interest rates, likely resulting in increased price pressures and increased borrowing.

Thus the weaker yen, with traders expecting less monetary tightening by Japanese authorities compared to earlier expectations.

The nation’s debt securities have declined this session, lifting the return on thirty-year bonds near to record highs, due to forecasts of higher borrowing and sustained inflationary pressures.

The markets will be calculating to what extent Sanae Takaichi’s policies will resemble the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

A market expert explained:

Different from previous comments, Takaichi has refrained from highlighting Abenomics during the party election, but experts understand her fundamental position and her approval of the former PM’s three-pillar approach.

Traders may therefore move to gain understanding on that position, as well as exactly how influential she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

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