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Market Reactions following the Japanese Leadership Election

FX analysts at leading banks have closed their previous recommendations for holding an optimistic view on the Japanese yen following the country’s ruling party elected Takaichi as the new chief.

In a report titled “Getting out of the yen,” a lead strategist of FX research commented:

We held a long yen position in our FX Blueprint but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty around Japanese economic goals as well as the schedule for BoJ monetary tightening.

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

The expert additionally noted that signs of fiscal dominance within Japan (where the government controls the central bank’s actions) represent a downside risk.

Gold Closes In On the $4,000/oz Level

Gold prices are achieving unprecedented levels, today, in its top-performing period since the late 1970s.

The immediate value of bullion has jumped by over 1% in recent trading at $3,944 an ounce, nearing the $4,000 threshold.

This indicates gold’s value has increased fifty percent since the start of January, heading for its top annual returns since the late 1970s.

Gold has been driven higher throughout the year due to multiple reasons, including rising concerns that government debts cannot be maintained.

The new leader’s election win in the Japanese election will only have reinforced concerns that politicians could seek to boost output via increased debt and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Financial Summary

Tokyo’s bourse has surged to unprecedented levels in Monday trading, while the yen is plunging, after the top position of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that Sanae Takaichi will become a PM favoring economic stimulus has sparked a surge of optimistic trading lifting Japan’s benchmark index up by 5%, rising by more than 2300 points ending at 48,085 points.

However, the currency is heading in the other direction – it has fallen almost 2% relative to the USD to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan soon, has long admired of Margaret Thatcher. However, while her social policies are right-leaning regarding social issues, the new leader follows a contrasting path to fiscal policy, and has advocate higher state investment and easy money policies.

Consequently, markets predict to persist with the country’s drive to boost economic growth though fiscal spending and reduced borrowing costs, which would lead to rising inflation and greater borrowing.

Thus yen depreciation, with traders expecting less monetary tightening in Tokyo compared to earlier expectations.

Japan’s government bond values have also fallen this session, driving higher the return on long-term Japanese bonds approaching peak levels, due to forecasts of increased debt issuance and sustained inflationary pressures.

The markets are evaluating to what extent Takaichi’s policies will echo the policies of Shinzo Abe implemented by previous leader Abe.

A brokerage head explained:

In contrast to last year, Takaichi has refrained from highlighting Abenomics in the recent vote, but most know her fundamental position and her approval of Shinzo Abe’s three-pillar philosophy.

Markets could then push for more information regarding her stance, plus the degree of influence she might become in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a “live” affair with a quarter-point increase potentially on the table...

Market Agenda

• 08:30 British Summer Time: European construction data for September
• 9.30am BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year