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Financial Market Response following Japan's Leadership Election

Foreign exchange experts from prominent banks have reportedly closed their positions for holding an optimistic view on the yen after the country’s leading political group chose Sanae Takaichi as its chief.

In commentary named “Getting out of the yen,” one global head for foreign exchange commented:

Our strategy was bullish on the yen within our portfolio but have now exited due to the party leadership vote. Takaichi’s unforeseen success brings back significant doubt regarding Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Experts agree that inflationary pressures exist in Japan, but questions are mounting about the approach to managing it.

The analyst also warned that signs of fiscal dominance in Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Approaches the $4,000/oz Level

Gold prices are hitting unprecedented levels, again, in its top-performing period since 1979.

The spot price of gold has surged by over 1% in recent trading reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows gold’s value has jumped half again since January 1st, heading for its top annual returns since the late 1970s.

Bullion has advanced in recent months because of various drivers, among them rising concerns that national debt levels may be unmanageable.

Sanae Takaichi’s victory in Japan is likely amplifying apprehensions that government officials may try to secure growth via increased debt and cheaper credit, and use inflation to diminish the worth of new borrowings.

Market Overview

Tokyo’s bourse has surged to a record high this morning, while the yen is plunging, after the chief role of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has triggered a wave of enthusiastic buying lifting the Tokyo stock index to a 5% gain, as it gained 2315 points to close at 48,085.

However, the currency is very much moving downward – it’s down almost 2% against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, who is expected to become the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. However, while she is conservative in social matters, she follows a contrasting path on budget matters, and promotes a revival of government spending and easy money policies.

As such, analysts anticipate to maintain Japan’s push to spur activity via government outlays and cheap credit, which would lead to increased price pressures and more debt.

Thus the falling currency, with traders expecting fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities have declined today, lifting the return on thirty-year bonds near to record highs, due to forecasts of more government loans and more persistent inflation.

Investors are evaluating the degree to which Takaichi’s plans will resemble the “Abenomics” programme advocated by previous leader Shinzo Abe.

A market expert noted:

Different from previous comments, Takaichi has refrained from highlighting the three-arrow strategy during the party election, but many are aware her underlying stance and her approval of Shinzo Abe’s three-arrow strategy.

Markets could then push to obtain clarity on her policies, plus the degree of influence she might become in directing monetary policy, given the October BoJ meeting is viewed as a “live” affair and a 25bp hike considered likely...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for September
• 6:30 PM UK time: Bank of England governor Bailey to speak at an investment conference this year