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Market Reactions following Japan's Ruling Party Vote

FX analysts at leading financial institutions have reportedly exited their previous positions to hold a bullish stance on the Japanese yen following the country’s governing party chose Sanae Takaichi as the new leader.

In a report called “Getting out of the yen,” a global head of FX research stated:

Our strategy was bullish on the yen as part of our strategy but have now exited after the weekend’s election result. Sanae Takaichi’s surprise victory creates renewed unpredictability around Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The analyst further cautioned evidence of political control across Japan (where the government controls monetary policy decisions) pose a potential danger.

Gold Closes In On the $4,000 Level

Bullion values are hitting fresh record highs, once more, in its top-performing period since the late 1970s.

The immediate value of the precious metal has surged more than 1 percent today at $3,944 an ounce, as it closes in on the $4,000 threshold.

This indicates the gold price has surged half again since January 1st, heading for its best annual gains in over 45 years.

Gold has been driven higher throughout the year by several factors, including rising concerns that government debts are unsustainable.

Takaichi’s victory in the party vote has further strengthened concerns that leaders could seek to stimulate the economy via increased debt and cheaper credit, and use inflation to reduce the real value of the resulting debt.

Market Overview

The Japanese equity market has jumped to an all-time peak this morning, while the yen is plunging, after the top position of the country’s ruling party went unexpectedly to by spending advocate Takaichi.

Expectations that the new leader will become a pro-stimulus prime minister has triggered a wave of enthusiastic buying lifting the Tokyo stock index higher by five percent, adding more than 2300 points to finish at 48,085.

But the yen is trending the opposite way – it has fallen nearly two percent against the US dollar at 150.3¥/$.

The incoming leader, who is expected to become Japan’s first female prime minister in the coming weeks, is a known fan of Margaret Thatcher. However, while she is conservative on social policy, the new leader adopts a different strategy to fiscal policy, and has advocate a revival of government spending and loose monetary policy.

Therefore, markets predict to continue Japan’s push to spur activity via government outlays and lower interest rates, which would lead to higher inflation and greater borrowing.

Hence the falling currency, as markets predict fewer interest rates hikes from the Bank of Japan than before.

Japan’s government bond values have declined today, pushing up the interest rate on thirty-year bonds near to peak levels, due to forecasts of increased debt issuance and lasting price increases.

Investors are evaluating how closely Sanae Takaichi’s proposals will resemble the policies of Shinzo Abe advocated by ex-prime minister Abe.

One analyst noted:

In contrast to last year, the leader has avoided from talking up the Abenomics program during the party election, but many are aware her core beliefs and her appreciation of the former PM’s three-pillar approach.

Investors might thus seek to obtain clarity on that position, plus the degree of influence she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a potential turning point and a rate rise potentially on the table...

Market Agenda

• 8:30 AM UK time: European construction data for the previous month
• 09:30 BST: British construction figures for the last month
• 6.30pm BST: Bank of England governor Andrew Bailey to deliver address at an investment conference this year