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Market Reactions to the Japanese Ruling Party Vote

Currency strategists from leading financial institutions have reportedly closed their previous positions to hold a long position regarding Japan’s currency after Japan’s governing party elected Takaichi to be its head.

In commentary named “Getting out of the yen,” a global head of FX research stated:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out following the weekend’s election result. The unexpected win by Takaichi reintroduces renewed unpredictability concerning 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 questions are mounting about the approach to managing it.

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

Gold Nears the $4,000 Mark

Gold prices are hitting new all-time peaks, once more, in its top-performing period since 1979.

The spot price of the precious metal has surged by over 1% this morning to $3,944 per ounce, approaching the $4,000 per ounce level.

This shows gold’s value has increased fifty percent from the beginning of the year, on track for its top annual returns since the Iranian Revolution.

The metal has risen this year due to multiple reasons, such as increasing fears that government debts are unsustainable.

The new leader’s election win in Japan is likely amplifying apprehensions that leaders could seek to stimulate the economy by borrowing more and lower interest rates, and depend on rising prices to reduce the real value of accumulated debt.

Market Overview

Tokyo’s bourse has rallied to unprecedented levels this morning, as the yen falls, after the leadership of the governing party was surprisingly won by fiscal dove Sanae Takaichi.

Predictions that the new leader will become a leader supporting government spending has ignited a surge of optimistic trading that has pushed the Nikkei 225 share index to a 5% gain, rising by over 2300 points to close at 48,085.

However, the currency is very much moving the opposite way – it dropped about 2 percent against the US dollar at 150.3¥/$.

Sanae Takaichi, set to be the first woman to lead Japan in the coming weeks, is a known fan of Thatcher. However, while she holds conservative views in social matters, Takaichi takes an un-Thatcherite approach in economic policy, and promotes higher state investment and easy money policies.

Therefore, analysts anticipate to persist with the country’s drive to spur activity though fiscal spending and lower interest rates, likely resulting in rising inflation and greater borrowing.

As a result yen depreciation, as markets predict less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have also fallen this session, pushing up the interest rate on long-term Japanese bonds near to peak levels, on expectations of increased debt issuance and lasting price increases.

Traders are evaluating how closely Sanae Takaichi’s policies will echo the “Abenomics” programme advocated by former PM Shinzo Abe.

A brokerage head explained:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy in the recent vote, but most know her underlying stance and her support of Shinzo Abe’s three-pillar approach.

Investors might thus seek for more information on that position, and how much impact she might become in directing the BoJ’s policy thinking, ahead of the BoJ’s next meeting is seen as a “live” affair with a quarter-point increase seen as a real possibility...

Market Agenda

• 8:30 AM UK time: European construction data for last month
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: Central bank head Bailey to deliver address at an investment conference this year