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Market Reactions following Japan's Ruling Party Vote

Currency strategists from major financial institutions have exited their previous recommendations to hold an optimistic view on Japan’s currency following the country’s leading political group chose Sanae Takaichi as its chief.

In a note named “Leaving yen positions,” a global head for foreign exchange stated:

We held a long yen position within our portfolio but are now getting out after the party leadership vote. Takaichi’s unforeseen success brings back renewed unpredictability around Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem in Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert also warned that signs of fiscal dominance in Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000 Level

Bullion values are hitting new all-time peaks, once more, in its strongest year since 1979.

The spot price of gold has jumped by over 1% today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This means bullion prices has jumped fifty percent from the beginning of the year, on track for its best annual gains in over 45 years.

Bullion has advanced this year because of various drivers, including growing worries that national debt levels cannot be maintained.

Sanae Takaichi’s success in the Japanese election will only have reinforced worries that government officials may try to secure growth by borrowing more and lower interest rates, and rely on inflation to diminish the worth of the resulting debt.

Market Overview

Tokyo’s bourse has rallied to an all-time peak in Monday trading, as the yen falls, following the chief role of the governing party was surprisingly won by stimulus supporter Takaichi.

Predictions that Takaichi is likely to be a PM favoring economic stimulus has triggered a rush of positive investment that has pushed Japan’s benchmark index to a 5% gain, rising by more than 2300 points ending at 48,085.

Yet the Japanese yen is trending in the other direction – it has fallen nearly two percent against the US dollar at 150.3¥/$.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, has long admired of Thatcher. Yet even though her social policies are right-leaning in social matters, the new leader follows a contrasting path to fiscal policy, and has advocate increased public expenditure and loose monetary policy.

As such, she’s expected to persist with the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, likely resulting in higher inflation and more debt.

Hence the weaker yen, as investors anticipate fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen this session, pushing up the return on its 30-year debt close to record highs, on expectations of higher borrowing and more persistent inflation.

Traders will be calculating the degree to which Sanae Takaichi’s plans will mirror the “Abenomics” programme implemented by previous leader Shinzo Abe.

One analyst explained:

Different from previous comments, she has not engaged from highlighting the three-arrow strategy in the recent vote, but experts understand her core beliefs and her appreciation of Shinzo Abe’s three-pillar strategy.

Markets could then push to gain understanding regarding her stance, and how much impact she may be in forming the central bank’s decisions, ahead of the BoJ’s next meeting is considered a key event and a rate rise seen as a real possibility...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for September
• 09:30 BST: British construction figures for the last month
• 6:30 PM UK time: Central bank head Bailey to speak at an investment conference this year