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Financial Market Response to the Japanese Ruling Party Vote

Foreign exchange experts at prominent investment firms have reportedly exited their previous recommendations for holding an optimistic view on the Japanese yen after Japan’s ruling party chose Sanae Takaichi to be its leader.

In a note called “Leaving yen positions,” a global head for foreign exchange stated:

We went long JPY in our FX Blueprint but are now getting out after the weekend’s election result. The unexpected win by Takaichi creates renewed unpredictability concerning Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

Analysts concur that inflationary pressures exist in Japan, but doubts are resurfacing on how it will be dealt with.

The strategist additionally noted evidence of political control across Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Closes In On $4,000 per ounce Threshold

Bullion values are hitting new all-time peaks, again, in its strongest year since the late 1970s.

The immediate value of bullion has jumped more than 1 percent in recent trading at $3,944 an ounce, as it closes in on the $4000/oz mark.

This indicates gold’s value has surged by 50% from the beginning of the year, heading for its strongest yearly performance in over 45 years.

Gold has been driven higher throughout the year because of various drivers, among them growing worries that national debt levels may be unmanageable.

The new leader’s victory in Japan will only have reinforced apprehensions that politicians may try to stimulate the economy through higher borrowing and lower interest rates, and rely on inflation to diminish the worth of the resulting debt.

Market Overview

Tokyo’s bourse has rallied to a record high this morning, as the yen falls, after the chief role of the country’s ruling party was unexpectedly secured by fiscal dove Takaichi.

Predictions that Sanae Takaichi will be a PM favoring economic stimulus has ignited a rush of positive investment that has pushed the Nikkei 225 share index up by 5%, as it gained more than 2300 points to finish at 48,085 points.

But the yen is heading the opposite way – it’s down about 2 percent versus the dollar to 150.3 yen per dollar.

Takaichi, set to be the nation’s initial woman PM soon, is a known fan of Thatcher. However, while she holds conservative views regarding social issues, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes a revival of government spending and easy money policies.

Consequently, markets predict to continue the national effort to stimulate its economy though fiscal spending and lower interest rates, which would lead to increased price pressures and increased borrowing.

Hence yen depreciation, as investors anticipate reduced rate increases by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices have declined in Monday trading, driving higher the yield on thirty-year bonds approaching all-time highs, due to forecasts of more government loans and more persistent inflation.

Traders are evaluating how closely the new leader’s proposals will echo the Abenomics strategy implemented by previous leader Abe.

A market expert explained:

In contrast to last year, she has not engaged from highlighting the Abenomics program during the party election, but many are aware her underlying stance and her appreciation of Shinzo Abe’s Three Arrows philosophy.

Markets could then push for more information on that position, as well as exactly how influential she may be in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a key event and a 25bp hike potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 9:30 AM UK time: British construction figures for the last month
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to speak at a financial forum this year