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Financial Market Response to the Japanese Political Shift

FX analysts at major investment firms have reportedly closed their strategies for holding a bullish stance regarding the Japanese yen following the country’s governing party elected Sanae Takaichi as its chief.

In a note titled “Exiting the yen,” a chief for currency analysis commented:

We went long JPY in our FX Blueprint but have now exited due to the party leadership vote. Takaichi’s unforeseen success brings back renewed unpredictability around Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue within the Japanese economy, but uncertainty is now going up again regarding how it will be addressed.

The analyst additionally noted that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Mark

Bullion values are hitting fresh record highs, once more, in its strongest year in over four decades.

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

This means bullion prices has increased half again from the beginning of the year, on track for its best annual gains in over 45 years.

The metal has risen in recent months due to multiple reasons, such as growing worries that government debts cannot be maintained.

Sanae Takaichi’s success in Japan has further strengthened concerns that government officials could seek to stimulate the economy via increased debt and reduced rates, and use inflation to erode the value of the resulting debt.

Financial Summary

Japan’s stock market has jumped to a record high this morning, as the yen falls, after the leadership of the governing party was surprisingly won by spending advocate Takaichi.

Predictions that Takaichi is likely to be a pro-stimulus prime minister has triggered a surge of optimistic trading driving the Nikkei 225 share index to a 5% gain, adding over 2300 points to close at 48,085 points.

But the yen is trending the opposite way – it has fallen about 2 percent against the US dollar reaching 150.3 against the greenback.

Takaichi, set to be Japan’s first female prime minister later this month, has long admired of Thatcher. However, while she holds conservative views in social matters, the new leader follows a contrasting path in economic policy, and promotes higher state investment and loose monetary policy.

As such, she’s expected to maintain Japan’s push to spur activity though fiscal spending and cheap credit, likely resulting in increased price pressures and more debt.

As a result the falling currency, as investors anticipate reduced rate increases in Tokyo relative to previous forecasts.

Japanese long-term bond prices 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.

The markets are evaluating how closely Sanae Takaichi’s plans will resemble the policies of Shinzo Abe advocated by former PM Abe.

One analyst noted:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but most know her underlying stance and her appreciation of Shinzo Abe’s three-pillar philosophy.

Investors might thus seek to obtain clarity on that position, and how much impact she may be in directing monetary policy, ahead of the BoJ’s next meeting is considered a key event and a 25bp hike seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for last month
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: Central bank head Bailey to deliver address at a financial forum this year