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Investor Sentiment following Japan's Ruling Party Vote

Currency strategists from leading investment firms have reportedly closed their previous positions to hold a bullish stance regarding Japan’s currency after the country’s ruling party selected Sanae Takaichi as its leader.

In commentary named “Exiting the yen,” one global head for foreign exchange explained:

We held a long yen position within our portfolio but have closed this due to the weekend’s election result. The unexpected win by Takaichi reintroduces too much uncertainty concerning Japan’s policy priorities and the timing of BoJ monetary tightening.

There is agreement that inflation is a problem in Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance across Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Nears the $4,000 Level

Gold prices are achieving fresh record highs, today, in its strongest year since the late 1970s.

The spot price of the precious metal has jumped by 1% or more today to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This shows the gold price has jumped by 50% from the beginning of the year, heading for its strongest yearly performance since the late 1970s.

Gold has been driven higher in recent months by several factors, including growing worries that national debt levels may be unmanageable.

Takaichi’s election win in Japan has further strengthened apprehensions that politicians will attempt to secure growth through higher borrowing and reduced rates, and rely on inflation to reduce the real value of accumulated debt.

Market Overview

Japan’s stock market has surged to a record high today, as the yen falls, following the leadership of the governing party was unexpectedly secured by fiscal dove Takaichi.

Predictions that the new leader will become a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving the Tokyo stock index up by 5%, as it gained over 2300 points ending at just over 48,000.

But the yen is very much moving in the other direction – it’s down about 2 percent relative to the USD to 150.3 yen per dollar.

Takaichi, who should become the first woman to lead Japan soon, is a known fan of Margaret Thatcher. But although she is conservative on social policy, she adopts a different strategy on budget matters, and supports increased public expenditure and easy money policies.

Therefore, she’s expected to continue Japan’s push to stimulate its economy via government outlays and reduced borrowing costs, potentially causing rising inflation and greater borrowing.

As a result yen depreciation, with traders expecting fewer interest rates hikes by Japanese authorities compared to earlier expectations.

The nation’s debt securities have declined this session, pushing up the yield on long-term Japanese bonds approaching all-time highs, due to forecasts of higher borrowing and sustained inflationary pressures.

The markets will be calculating to what extent Takaichi’s policies will mirror the “Abenomics” programme advocated by previous leader Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from promoting Abenomics during the party election, but most know her core beliefs and her support of Shinzo Abe’s three-arrow philosophy.

Traders may therefore move to gain understanding on her policies, as well as exactly how influential she may be in directing monetary policy, given the October BoJ meeting is seen as a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for the previous month
• 09:30 BST: UK building sector data for September
• 6.30pm BST: Bank of England governor Bailey to give keynote speech at Scotland’s Global Investment Summit this year