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Investor Sentiment to Japan's Leadership Election

Currency strategists from leading investment firms have terminated their previous recommendations for holding a long position on the yen after Japan’s ruling party chose Takaichi as its leader.

In a note titled “Leaving yen positions,” a chief for foreign exchange explained:

We held a long yen position within our portfolio but are now getting out following the weekend’s election result. Takaichi’s unforeseen success creates too much uncertainty regarding Japanese economic goals and the expected date of BoJ monetary tightening.

Analysts concur that inflationary pressures exist for Japan, but questions are mounting regarding how it will be addressed.

The strategist additionally noted evidence of political control in Japan (where state authorities influence the central bank’s actions) are a tail risk.

Gold Nears $4,000 per ounce Mark

Bullion values are hitting fresh record highs, again, in its strongest year since the late 1970s.

The immediate value of the precious metal has surged by over 1% this morning at $3,944 an ounce, approaching the $4000/oz mark.

This indicates bullion prices has surged fifty percent since January 1st, on track for its best annual gains in over 45 years.

The metal has risen in recent months due to multiple reasons, such as increasing fears that national debt levels may be unmanageable.

Takaichi’s victory in the Japanese election is likely amplifying concerns that politicians could seek to boost output by borrowing more and reduced rates, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has surged to a record high today, while the yen is plunging, following the chief role of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that Sanae Takaichi will become a leader supporting government spending has ignited a surge of optimistic trading lifting the Tokyo stock index to a 5% gain, adding 2315 points ending at 48,085 points.

Yet the Japanese yen is very much moving the opposite way – it’s down almost 2% versus the dollar reaching 150.3 against the greenback.

Takaichi, set to be the first woman to lead Japan later this month, is a known fan of the former UK leader. However, while her social policies are right-leaning regarding social issues, the new leader follows a contrasting path in economic policy, and has advocate a revival of government spending and loose monetary policy.

Consequently, analysts anticipate to continue the national effort to stimulate its economy via government outlays and reduced borrowing costs, potentially causing rising inflation and more debt.

As a result the weaker yen, as markets predict reduced rate increases from the Bank of Japan than before.

Japanese long-term bond prices are also down this session, driving higher the return on long-term Japanese bonds approaching all-time highs, due to forecasts of more government loans and more persistent inflation.

Investors are evaluating how closely the new leader’s plans will resemble the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst commented:

Different from previous comments, she has not engaged from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her approval of Abe’s Three Arrows strategy.

Markets could then push to obtain clarity on her policies, plus the degree of influence she could be in shaping monetary policy, ahead of the BoJ’s next meeting is seen as a potential turning point and a 25bp hike seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at a financial forum this year