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Financial Market Response to the Japanese Political Shift

FX analysts at prominent financial institutions have exited their previous recommendations to hold a long position regarding the Japanese yen after Japan’s leading political group elected Takaichi to be its chief.

In commentary titled “Getting out of the yen,” a chief for foreign exchange explained:

Our strategy was bullish on the yen within our portfolio but have now exited after the party leadership vote. The unexpected win by Takaichi creates significant doubt around Japan’s policy priorities and the expected date of BoJ monetary tightening.

There is agreement that inflationary pressures exist for Japan, but uncertainty is now going up again regarding how it will be addressed.

The analyst further cautioned indicators of government influence in Japan (where the government controls the central bank’s actions) are a tail risk.

Gold Approaches the $4,000 Mark

Gold prices are achieving new all-time peaks, again, in its top-performing period since 1979.

The spot price of gold has climbed by 1% or more today reaching $3,944/oz, as it closes in on the $4000/oz mark.

This indicates the gold price has jumped half again since the start of January, likely to achieve its top annual returns since the late 1970s.

Bullion has advanced throughout the year due to multiple reasons, such as growing worries that national debt levels are unsustainable.

The new leader’s election win in the Japanese election has further strengthened concerns that leaders could seek to boost output via increased debt and lower interest rates, and use inflation to erode the value of new borrowings.

Market Overview

Japan’s stock market has rallied to a record high this morning, while the yen is plunging, after the leadership of the country’s ruling party was unexpectedly secured by stimulus supporter Takaichi.

Forecasts that Sanae Takaichi will be a pro-stimulus prime minister has triggered a surge of optimistic trading that has pushed the Tokyo stock index higher by five percent, rising by more than 2300 points ending at 48,085 points.

But the yen is very much moving downward – it has fallen almost 2% versus the dollar at 150.3¥/$.

Sanae Takaichi, set to be the first woman to lead Japan soon, is a known fan of Thatcher. Yet even though she holds conservative views regarding social issues, Takaichi adopts a different strategy to fiscal policy, and promotes increased public expenditure and loose monetary policy.

As such, markets predict to maintain the national effort to stimulate its economy though fiscal spending and reduced borrowing costs, likely resulting in rising inflation and increased borrowing.

Hence the weaker yen, as markets predict fewer interest rates hikes from the Bank of Japan relative to previous forecasts.

Japan’s government bond values have declined today, lifting the yield on its 30-year debt close to all-time highs, due to forecasts of increased debt issuance and sustained inflationary pressures.

The markets are evaluating the degree to which Takaichi’s proposals will mirror the Abenomics strategy implemented by ex-prime minister Abe.

A brokerage head noted:

In contrast to last year, she has not engaged from highlighting Abenomics in the recent vote, but most know her fundamental position and her appreciation of Abe’s three-arrow approach.

Investors might thus seek for more information on that position, plus the degree of influence she may be in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase considered likely...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for last month
• 09:30 BST: UK construction PMI for September
• 6:30 PM UK time: Central bank head Bailey to speak at a financial forum this year