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Investor Sentiment to Japan's Political Shift

Currency strategists from prominent banks have closed their previous recommendations to hold a long position on Japan’s currency following Japan’s ruling party selected Sanae Takaichi to be its head.

In a note named “Leaving yen positions,” a chief for foreign exchange commented:

We went long JPY as part of our strategy but are now getting out after the party leadership vote. Sanae Takaichi’s surprise victory reintroduces significant doubt concerning Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue within the Japanese economy, but questions are mounting on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Nears $4,000 per ounce Mark

Gold prices are hitting fresh record highs, again, during its best performance in over four decades.

The current price of the precious metal has climbed more than 1 percent in recent trading at $3,944 an ounce, nearing the $4000/oz mark.

This indicates bullion prices has jumped fifty percent from the beginning of the year, on track for its strongest yearly performance in over 45 years.

The metal has risen this year due to multiple reasons, such as growing worries that public borrowing may be unmanageable.

Sanae Takaichi’s success in the Japanese election has further strengthened apprehensions that politicians could seek to secure growth via increased debt and lower interest rates, and use inflation to erode the value of accumulated debt.

Financial Summary

Japan’s stock market has surged to a record high this morning, while the yen is plunging, after the leadership of the country’s ruling party was unexpectedly secured by spending advocate Sanae Takaichi.

Expectations that Takaichi will be a PM favoring economic stimulus has triggered a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, as it gained more than 2300 points to finish at 48,085 points.

However, the currency is heading in the other direction – it has fallen nearly two percent against the US dollar at 150.3¥/$.

Takaichi, who is expected to become the first woman to lead Japan soon, is a known fan of the former UK leader. However, while her social policies are right-leaning on social policy, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes increased public expenditure and easy money policies.

As such, markets predict to continue the national effort to boost economic growth through public investment and lower interest rates, potentially causing increased price pressures and greater borrowing.

Hence yen depreciation, as investors anticipate less monetary tightening by Japanese authorities relative to previous forecasts.

Japan’s government bond values have declined in Monday trading, driving higher the yield on its 30-year debt approaching peak levels, because of predictions of increased debt issuance and more persistent inflation.

Traders are evaluating how closely the new leader’s plans will mirror the “Abenomics” programme pushed by ex-prime minister Abe.

A market expert explained:

In contrast to last year, she has not engaged from promoting the three-arrow strategy in the recent vote, but experts understand her core beliefs and her approval of Abe’s three-pillar philosophy.

Traders may therefore move to gain understanding on her policies, as well as exactly how influential she could be in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a potential turning point and a 25bp hike potentially on the table...

Today’s Schedule

• 8.30am BST: European construction data for September
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to give keynote speech at an investment conference this year