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Market Reactions to the Japanese Political Shift

Currency strategists from leading investment firms have exited their previous positions for holding a bullish stance on the Japanese yen after Japan’s leading political group selected Takaichi as the new chief.

In commentary named “Leaving yen positions,” a chief for currency analysis commented:

We held a long yen position as part of our strategy but have closed this following the weekend’s election result. Sanae Takaichi’s surprise victory creates renewed unpredictability concerning the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but questions are mounting on how it will be dealt with.

The expert further cautioned that signs of fiscal dominance within Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000 Level

The gold price are reaching unprecedented levels, once more, in its strongest year since the late 1970s.

The immediate value of gold has jumped by over 1% this morning reaching $3,944/oz, approaching the $4,000 threshold.

This indicates gold’s value has increased half again since January 1st, heading for its strongest yearly performance in over 45 years.

The metal has risen throughout the year because of various drivers, including rising concerns that government debts cannot be maintained.

Sanae Takaichi’s election win in the Japanese election has further strengthened worries that government officials may try to secure growth through higher borrowing and lower interest rates, and depend on rising prices to diminish the worth of the resulting debt.

Trading Update

Tokyo’s bourse has surged to unprecedented levels this morning, with the currency dropping, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi will become a PM favoring economic stimulus has ignited a wave of enthusiastic buying driving the Nikkei 225 share index to a 5% gain, as it gained over 2300 points ending at 48,085.

But the yen is heading in the other direction – it’s down about 2 percent relative to the USD reaching 150.3 against the greenback.

The incoming leader, set to be Japan’s first female prime minister in the coming weeks, is a known fan of Thatcher. But although her social policies are right-leaning on social policy, the new leader takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and loose monetary policy.

Consequently, analysts anticipate to maintain the country’s drive to spur activity though fiscal spending and reduced borrowing costs, potentially causing increased price pressures and greater borrowing.

Hence yen depreciation, as markets predict fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen in Monday trading, pushing up the return on long-term Japanese bonds approaching peak levels, due to forecasts of increased debt issuance and sustained inflationary pressures.

The markets will be calculating the degree to which the new leader’s policies will echo the “Abenomics” programme pushed by former PM Shinzo Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but most know her core beliefs and her support of Abe’s three-arrow strategy.

Investors might thus seek for more information on that position, and how much impact she may be in shaping monetary policy, ahead of the BoJ’s next meeting is viewed as a potential turning point and a rate rise seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: European construction data for last month
• 09:30 BST: UK building sector data for the last month
• 6.30pm BST: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit this year