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Financial Market Response following the Japanese Leadership Election

Currency strategists from prominent investment firms have exited their positions for holding a long position on the Japanese yen after Japan’s leading political group elected Sanae Takaichi as the new chief.

In a note called “Getting out of the yen,” one global head for currency analysis stated:

Our strategy was bullish on the yen as part of our strategy but are now getting out after the LDP election outcome. Sanae Takaichi’s surprise victory creates significant doubt around Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The analyst additionally noted evidence of political control across Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Level

Gold prices are reaching new all-time peaks, today, in its top-performing period in over four decades.

The spot price of gold has jumped by 1% or more in recent trading at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This shows bullion prices has jumped by 50% from the beginning of the year, heading for its top annual returns since the late 1970s.

Bullion has advanced in recent months due to multiple reasons, among them growing worries that public borrowing cannot be maintained.

Takaichi’s victory in the party vote will only have reinforced apprehensions that government officials will attempt to boost output via increased debt and lower interest rates, and depend on rising prices to erode the value of the resulting debt.

Trading Update

Japan’s stock market has rallied to a record high in Monday trading, as the yen falls, after the chief role of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Predictions that the new leader is likely to be a leader supporting government spending has triggered a rush of positive investment lifting the Nikkei 225 share index up by 5%, as it gained 2315 points to finish at 48,085 points.

Yet the Japanese yen is heading in the other direction – it’s down nearly two percent against the US dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become Japan’s first female prime minister soon, is a long-time admirer of Thatcher. However, while her social policies are right-leaning in social matters, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and accommodative central bank measures.

As such, markets predict to persist with the country’s drive to boost economic growth though fiscal spending and cheap credit, which would lead to increased price pressures and greater borrowing.

Hence the weaker yen, as investors anticipate less monetary tightening in Tokyo than before.

Japanese long-term bond prices have declined in Monday trading, driving higher the interest rate on its 30-year debt approaching all-time highs, on expectations of more government loans and lasting price increases.

Traders are evaluating to what extent Takaichi’s proposals will mirror the “Abenomics” programme pushed by former PM Shinzo Abe.

A brokerage head commented:

Different from previous comments, the leader has avoided from promoting the Abenomics program during the party election, but many are aware her fundamental position and her approval of the former PM’s Three Arrows approach.

Traders may therefore move to gain understanding on her policies, and how much impact she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a potential turning point and a rate rise considered likely...

Market Agenda

• 08:30 British Summer Time: European construction data for last month
• 09:30 BST: UK construction PMI for the last month
• 18:30 BST: Bank of England governor Andrew Bailey to give keynote speech at an investment conference this year