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Market Reactions to Japan's Ruling Party Vote

Foreign exchange experts from leading banks have closed their strategies for holding an optimistic view regarding Japan’s currency after Japan’s governing party elected Sanae Takaichi to be its head.

In commentary titled “Getting out of the yen,” a lead strategist for foreign exchange commented:

Our strategy was bullish on the yen within our portfolio but have now exited due to the party leadership vote. The unexpected win by Takaichi creates renewed unpredictability regarding the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist for Japan, but questions are mounting on how it will be dealt with.

The analyst additionally noted evidence of political control within Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000/oz Level

Bullion values are hitting new all-time peaks, again, in its top-performing period since 1979.

The spot price of gold has surged by over 1% this morning to $3,944 per ounce, nearing the $4,000 threshold.

This shows bullion prices has surged by 50% since January 1st, on track for its strongest yearly performance in over 45 years.

Bullion has advanced this year because of various drivers, such as rising concerns that government debts may be unmanageable.

The new leader’s election win in Japan has further strengthened concerns that politicians will attempt to boost output by borrowing more and cheaper credit, and rely on inflation to diminish the worth of the resulting debt.

Financial Summary

Tokyo’s bourse has jumped to unprecedented levels in Monday trading, with the currency dropping, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that the new leader is likely to be a leader supporting government spending has ignited a wave of enthusiastic buying that has pushed the Tokyo stock index higher by five percent, as it gained over 2300 points to finish at 48,085 points.

However, the currency is heading the opposite way – it dropped almost 2% relative to the USD reaching 150.3 against the greenback.

The incoming leader, who should become Japan’s first female prime minister later this month, is a known fan of Thatcher. But although she holds conservative views regarding social issues, she follows a contrasting path to fiscal policy, and supports a revival of government spending and loose monetary policy.

Consequently, markets predict to maintain Japan’s push to stimulate its economy via government outlays and lower interest rates, which would lead to rising inflation and more debt.

Thus yen depreciation, with traders expecting less monetary tightening from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices have also fallen this session, driving higher the yield on its 30-year debt near to peak levels, on expectations of more government loans and lasting price increases.

The markets are assessing how closely Sanae Takaichi’s proposals will resemble the “Abenomics” programme pushed by former PM Abe.

A brokerage head noted:

Different from previous comments, she has not engaged from talking up the Abenomics program in this LDP leadership campaign, but most know her fundamental position and her support of Abe’s three-pillar strategy.

Traders may therefore move for more information on that position, as well as exactly how influential she might become in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a key event and a rate rise considered likely...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 6:30 PM UK time: BOE chief the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year