🔗 Share this article

Market Reactions to the Japanese Ruling Party Vote

Currency strategists from prominent investment firms have terminated their previous positions for holding an optimistic view regarding the Japanese yen after the country’s ruling party selected Sanae Takaichi as its head.

In commentary titled “Leaving yen positions,” a chief of FX research commented:

Our strategy was bullish on the yen within our portfolio but have now exited due to the LDP election outcome. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability regarding Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist for Japan, but uncertainty is now going up again about the approach to managing it.

The analyst further cautioned evidence of political control across Japan (where state authorities influence the BoJ’s moves) represent a downside risk.

Gold Closes In On the $4,000/oz Threshold

Bullion values are achieving fresh record highs, again, in its strongest year in over four decades.

The immediate value of the precious metal has surged by 1% or more this morning at $3,944 an ounce, nearing the $4,000 per ounce level.

This means gold’s value has jumped fifty percent since the start of January, heading for its top annual returns since the late 1970s.

Gold has been driven higher in recent months because of various drivers, among them rising concerns that public borrowing are unsustainable.

Takaichi’s success in the Japanese election has further strengthened worries that leaders could seek to boost output by borrowing more and cheaper credit, and rely on inflation to reduce the real value of the resulting debt.

Market Overview

Japan’s stock market has rallied to unprecedented levels today, while the yen is plunging, after the chief role of the governing party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that the new leader is likely to be a pro-stimulus prime minister has sparked a rush of positive investment lifting the Nikkei 225 share index higher by five percent, rising by more than 2300 points ending at 48,085 points.

However, the currency is heading downward – it dropped nearly two percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, has long admired of Thatcher. However, while she holds conservative views regarding social issues, Takaichi takes an un-Thatcherite approach on budget matters, and has advocate higher state investment and loose monetary policy.

Therefore, she’s expected to continue Japan’s push to stimulate its economy though fiscal spending and reduced borrowing costs, which would lead to rising inflation and more debt.

Hence yen depreciation, with traders expecting less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices are also down today, lifting the return on thirty-year bonds near to peak levels, on expectations of more government loans and sustained inflationary pressures.

The markets are assessing how closely Sanae Takaichi’s plans will echo the Abenomics strategy implemented by former PM Abe.

A brokerage head commented:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but most know her core beliefs and her appreciation of Shinzo Abe’s three-pillar philosophy.

Investors might thus seek to obtain clarity on that position, and how much impact she could be in forming the central bank’s decisions, with the Bank of Japan’s October session is viewed as a key event and a 25bp hike potentially on the table...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for last month
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to deliver address at a financial forum this year