🔗 Share this article

Market Reactions following the Japanese Leadership Election

Currency strategists at leading financial institutions have closed their previous recommendations for holding a long position on the yen following the country’s governing party elected Sanae Takaichi as its head.

In a note called “Exiting the yen,” one global head of FX research commented:

We held a long yen position as part of our strategy but have closed this due to the party leadership vote. Sanae Takaichi’s surprise victory reintroduces too much uncertainty regarding the nation’s policy focus as well as the schedule for BoJ monetary tightening.

Analysts concur that inflation is a problem within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist also warned indicators of government influence across Japan (where the government controls the BoJ’s moves) represent a downside risk.

Gold Nears the $4,000/oz Level

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

The current price of the precious metal has jumped by 1% or more in recent trading to $3,944 per ounce, as it closes in on the $4000/oz mark.

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

The metal has risen throughout the year due to multiple reasons, such as rising concerns that national debt levels are unsustainable.

Sanae Takaichi’s success in Japan is likely amplifying concerns that leaders could seek to boost output by borrowing more and lower interest rates, and use inflation to reduce the real value of new borrowings.

Financial Summary

The Japanese equity market has rallied to a record high this morning, with the currency dropping, following the top position of the governing party was surprisingly won by fiscal dove Sanae Takaichi.

Forecasts that Sanae Takaichi will become a PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Tokyo stock index up by 5%, rising by 2315 points to close at 48,085.

However, the currency is trending in the other direction – it has fallen almost 2% against the US dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become the nation’s initial woman PM in the coming weeks, is a known fan of Thatcher. But although she holds conservative views in social matters, Takaichi takes an un-Thatcherite approach on budget matters, and supports increased public expenditure and loose monetary policy.

Therefore, analysts anticipate to maintain the country’s drive to stimulate its economy through public investment and cheap credit, likely resulting in rising inflation and increased borrowing.

As a result the falling currency, as markets predict less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices are also down in Monday trading, driving higher the interest rate on long-term Japanese bonds approaching record highs, on expectations of higher borrowing and sustained inflationary pressures.

Traders will be calculating to what extent Takaichi’s policies will mirror the “Abenomics” programme pushed by ex-prime minister Shinzo Abe.

A brokerage head explained:

In contrast to last year, the leader has avoided from promoting Abenomics in the recent vote, but many are aware her core beliefs and her appreciation of the former PM’s Three Arrows philosophy.

Investors might thus seek to obtain clarity regarding her stance, plus the degree of influence she may be in shaping the central bank’s decisions, given the October BoJ meeting is considered a potential turning point and a rate rise considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for last month
• 09:30 BST: UK construction PMI for the last month
• 18:30 BST: Central bank head Andrew Bailey to speak at Scotland’s Global Investment Summit this year