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Market Reactions following the Japanese Leadership Election

Currency strategists at major banks have terminated their previous recommendations to hold a bullish stance on the yen following Japan’s leading political group elected Sanae Takaichi as the new chief.

In commentary titled “Exiting the yen,” one chief for currency analysis stated:

We held a long yen position in our FX Blueprint but have now exited due to the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability around Japanese economic goals and the expected date of BoJ monetary tightening.

There is agreement that rising prices are an issue for Japan, but uncertainty is now going up again on how it will be dealt with.

The expert also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000/oz Level

Gold prices are reaching fresh record highs, once more, in its strongest year since the late 1970s.

The immediate value of gold has surged by over 1% in recent trading reaching $3,944/oz, approaching the $4,000 threshold.

This indicates bullion prices has increased half again from the beginning of the year, on track for its top annual returns since the late 1970s.

The metal has risen this year by several factors, including growing worries that government debts are unsustainable.

The new leader’s victory in the party vote is likely amplifying apprehensions that leaders could seek to boost output through higher borrowing and cheaper credit, and depend on rising prices to diminish the worth of new borrowings.

Trading Update

The Japanese equity market has jumped to unprecedented levels in Monday trading, with the currency dropping, after the top position of the country’s ruling party went unexpectedly to by spending advocate Takaichi.

Forecasts that the new leader is likely to be a PM favoring economic stimulus has ignited a wave of enthusiastic buying lifting the Tokyo stock index higher by five percent, rising by more than 2300 points to close at just over 48,000.

However, the currency is trending in the other direction – it has fallen almost 2% against the US dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become Japan’s first female prime minister later this month, has long admired of the former UK leader. However, while she holds conservative views in social matters, Takaichi follows a contrasting path on budget matters, and promotes a revival of government spending and easy money policies.

Therefore, markets predict to maintain Japan’s push to boost economic growth via government outlays and lower interest rates, likely resulting in higher inflation and more debt.

As a result the falling currency, with traders expecting fewer interest rates hikes by Japanese authorities than before.

Japanese long-term bond prices have also fallen today, lifting the return on thirty-year bonds approaching record highs, on expectations of more government loans and lasting price increases.

Traders are evaluating to what extent Takaichi’s policies will mirror the Abenomics strategy advocated by previous leader Abe.

One analyst explained:

Different from previous comments, the leader has avoided from promoting the Abenomics program in the recent vote, but most know her fundamental position and her appreciation of Abe’s three-pillar approach.

Markets could then push to gain understanding on that position, plus the degree of influence she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a key event and a rate rise considered likely...

Market Agenda

• 8.30am BST: European construction data for last month
• 9.30am BST: UK building sector data for September
• 18:30 BST: Bank of England governor Bailey to deliver address at a financial forum this year