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Market Reactions to Japan's Political Shift

Currency strategists at prominent financial institutions have exited their positions for holding a long position on the yen after Japan’s leading political group chose Sanae Takaichi as its leader.

In a report called “Exiting the yen,” a chief for foreign exchange explained:

We went long JPY as part of our strategy but have now exited following the weekend’s election result. Sanae Takaichi’s surprise victory brings back renewed unpredictability regarding Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem for Japan, but questions are mounting about the approach to managing it.

The strategist additionally noted evidence of political control in Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Closes In On the $4,000 Threshold

Gold prices are hitting fresh record highs, today, in its strongest year in over four decades.

The current price of gold has surged more than 1 percent this morning at $3,944 an ounce, approaching the $4,000 per ounce level.

This indicates the gold price has jumped half again from the beginning of the year, on track for its strongest yearly performance since the Iranian Revolution.

The metal has risen this year because of various drivers, such as rising concerns that public borrowing cannot be maintained.

Takaichi’s election win in the Japanese election has further strengthened concerns that government officials may try to boost output via increased debt and lower interest rates, and depend on rising prices to diminish the worth of accumulated debt.

Trading Update

Tokyo’s bourse has rallied to a record high this morning, with the currency dropping, after the leadership of the LDP was unexpectedly secured by fiscal dove Takaichi.

Expectations that Sanae Takaichi will be a PM favoring economic stimulus has sparked a rush of positive investment lifting the Nikkei 225 share index up by 5%, rising by 2315 points to finish at just over 48,000.

Yet the Japanese yen is very much moving the opposite way – it dropped almost 2% relative to the USD at 150.3¥/$.

Takaichi, who is expected to become the nation’s initial woman PM soon, is a known fan of Thatcher. However, while she is conservative regarding social issues, the new leader adopts a different strategy in economic policy, and promotes increased public expenditure and accommodative central bank measures.

Therefore, she’s expected to persist with the national effort to stimulate its economy through public investment and lower interest rates, which would lead to increased price pressures and increased borrowing.

Hence the falling currency, as investors anticipate fewer interest rates hikes by Japanese authorities compared to earlier expectations.

Japan’s government bond values have declined this session, lifting the yield on its 30-year debt near to peak levels, because of predictions of more government loans and sustained inflationary pressures.

Investors will be calculating how closely the new leader’s policies will resemble the policies of Shinzo Abe pushed by previous leader Abe.

One analyst noted:

Different from previous comments, Takaichi has refrained from promoting the Abenomics program in this LDP leadership campaign, but experts understand her fundamental position and her approval of the former PM’s three-pillar approach.

Traders may therefore move to gain understanding on her policies, as well as exactly how influential she may be in directing the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a “live” affair and a rate rise potentially on the table...

Market Agenda

• 8:30 AM UK time: European construction data for September
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: BOE chief Bailey to give keynote speech at an investment conference this year