🔗 Share this article

Market Reactions to the Japanese Political Shift

Foreign exchange experts from major investment firms have terminated their recommendations for holding a long position regarding the yen following the country’s leading political group selected Sanae Takaichi to be its leader.

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

We went long JPY in our FX Blueprint but have now exited following the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty regarding Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue for Japan, but doubts are resurfacing regarding how it will be addressed.

The expert additionally noted that signs of fiscal dominance within Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

Gold Nears $4,000 per ounce Mark

Gold prices are reaching unprecedented levels, once more, in its top-performing period since the late 1970s.

The immediate value of the precious metal has climbed by over 1% today to $3,944 per ounce, as it closes in on the $4000/oz mark.

This indicates bullion prices has increased fifty percent from the beginning of the year, heading for its best annual gains in over 45 years.

Bullion has advanced throughout the year because of various drivers, among them growing worries that public borrowing cannot be maintained.

Takaichi’s election win in the party vote has further strengthened concerns that leaders could seek to stimulate the economy by borrowing more and reduced rates, and use inflation to diminish the worth of new borrowings.

Financial Summary

Japan’s stock market has jumped to a record high in Monday trading, with the currency dropping, after the chief role of the country’s ruling party went unexpectedly to by fiscal dove Sanae Takaichi.

Forecasts that Takaichi is likely to be a PM favoring economic stimulus has ignited a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, as it gained over 2300 points to finish at 48,085.

Yet the Japanese yen is very much moving the opposite way – it has fallen almost 2% versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who should become Japan’s first female prime minister later this month, is a known fan of the former UK leader. But although her social policies are right-leaning in social matters, she adopts a different strategy in economic policy, and supports higher state investment and accommodative central bank measures.

As such, analysts anticipate to maintain the country’s drive to boost economic growth through public investment and lower interest rates, likely resulting in increased price pressures and increased borrowing.

As a result the falling currency, as investors anticipate less monetary tightening by Japanese authorities than before.

Japan’s government bond values have declined today, driving higher the yield on its 30-year debt close to peak levels, on expectations of higher borrowing and lasting price increases.

The markets are assessing how closely the new leader’s plans will echo the “Abenomics” programme pushed by previous leader Shinzo Abe.

A brokerage head noted:

Different from previous comments, she has not engaged from talking up Abenomics during the party election, but experts understand her underlying stance and her support of Abe’s three-pillar strategy.

Markets could then push to gain understanding on that position, as well as exactly how influential she may be in directing the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike potentially on the table...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: Bank of England governor Bailey to speak at a financial forum this year