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Market Reactions following Japan's Ruling Party Vote

Foreign exchange experts at leading financial institutions have terminated their positions to hold a bullish stance on the yen after the country’s governing party elected Sanae Takaichi to be its chief.

In a report called “Getting out of the yen,” one global head of FX research explained:

Our strategy was bullish on the yen within our portfolio but are now getting out following the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability concerning Japanese economic goals and the timing of BoJ monetary tightening.

Experts agree that inflation is a problem in Japan, but questions are mounting about the approach to managing it.

The analyst additionally noted indicators of government influence across Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Level

The gold price are reaching unprecedented levels, today, in its top-performing period since the late 1970s.

The immediate value of bullion has surged more than 1 percent today to $3,944 per ounce, nearing the $4000/oz mark.

This indicates bullion prices has jumped by 50% from the beginning of the year, likely to achieve its best annual gains since the Iranian Revolution.

Gold has been driven higher throughout the year because of various drivers, among them increasing fears that public borrowing are unsustainable.

Takaichi’s election win in the Japanese election has further strengthened apprehensions that government officials may try to stimulate the economy through higher borrowing and lower interest rates, and use inflation to diminish the worth of new borrowings.

Trading Update

The Japanese equity market has rallied to a record high this morning, with the currency dropping, following the chief role of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Predictions that the new leader will become a PM favoring economic stimulus has ignited a wave of enthusiastic buying lifting the Nikkei 225 share index higher by five percent, as it gained 2315 points to finish at just over 48,000.

Yet the Japanese yen is trending downward – it has fallen almost 2% versus the dollar reaching 150.3 against the greenback.

The incoming leader, who should become Japan’s first female prime minister soon, is a long-time admirer of the former UK leader. However, while she is conservative in social matters, she takes an un-Thatcherite approach to fiscal policy, and has advocate a revival of government spending and accommodative central bank measures.

As such, markets predict to persist with Japan’s push to spur activity via government outlays and reduced borrowing costs, likely resulting in increased price pressures and more debt.

As a result yen depreciation, as markets predict less monetary tightening from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices have also fallen in Monday trading, driving higher the return on long-term Japanese bonds close to peak levels, due to forecasts of higher borrowing and more persistent inflation.

Investors are evaluating to what extent Takaichi’s policies will resemble the Abenomics strategy advocated by ex-prime minister Abe.

One analyst explained:

Different from previous comments, she has not engaged from promoting the three-arrow strategy during the party election, but many are aware her core beliefs and her support of Shinzo Abe’s Three Arrows philosophy.

Investors might thus seek to gain understanding on her policies, as well as exactly how influential she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a potential turning point and a rate rise considered likely...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 9.30am BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to give keynote speech at an investment conference this year