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Investor Sentiment following Japan's Ruling Party Vote

FX analysts at leading investment firms have reportedly exited their previous recommendations for holding a bullish stance on Japan’s currency after the country’s ruling party selected Takaichi as its head.

In a note called “Exiting the yen,” one global head of FX research stated:

Our strategy was bullish on the yen within our portfolio but have closed this after the weekend’s election result. Takaichi’s unforeseen success reintroduces significant doubt regarding Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem for Japan, but doubts are resurfacing on how it will be dealt with.

The strategist further cautioned that signs of fiscal dominance across Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000 Level

Gold prices are hitting unprecedented levels, once more, in its strongest year since the late 1970s.

The current price of gold has jumped more than 1 percent in recent trading reaching $3,944/oz, approaching the $4,000 threshold.

This shows bullion prices has jumped fifty percent since January 1st, heading for its strongest yearly performance since the Iranian Revolution.

Gold has been driven higher throughout the year due to multiple reasons, such as rising concerns that public borrowing may be unmanageable.

Sanae Takaichi’s victory in the party vote is likely amplifying concerns that politicians will attempt to stimulate the economy via increased debt and reduced rates, and depend on rising prices to diminish the worth of the resulting debt.

Trading Update

Tokyo’s bourse has rallied to unprecedented levels in Monday trading, while the yen is plunging, after the chief role of the country’s ruling party was unexpectedly secured by fiscal dove Takaichi.

Forecasts that Sanae Takaichi will be a PM favoring economic stimulus has ignited a wave of enthusiastic buying that has pushed the Tokyo stock index higher by five percent, as it gained more than 2300 points to finish at 48,085 points.

However, the currency is very much moving in the other direction – it’s down nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, who should become Japan’s first female prime minister soon, is a known fan of Margaret Thatcher. But although her social policies are right-leaning on social policy, the new leader takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and easy money policies.

As such, markets predict to persist with the national effort to stimulate its economy though fiscal spending and cheap credit, potentially causing higher inflation and greater borrowing.

Thus yen depreciation, as investors anticipate reduced rate increases from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen this session, pushing up the yield on long-term Japanese bonds near to record highs, because of predictions of increased debt issuance and lasting price increases.

Investors are assessing to what extent the new leader’s proposals will resemble the “Abenomics” programme pushed by previous leader Abe.

A market expert commented:

In contrast to last year, Takaichi has refrained from promoting the three-arrow strategy in the recent vote, but many are aware her underlying stance and her appreciation of the former PM’s three-arrow approach.

Traders may therefore move to obtain clarity on her policies, plus the degree of influence she may be in shaping monetary policy, with the Bank of Japan’s October session is viewed as a key event and a 25bp hike considered likely...

Market Agenda

• 8.30am BST: Eurozone construction PMI for September
• 09:30 BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to speak at a financial forum this year