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Market Reactions to Japan's Ruling Party Vote

Foreign exchange experts at leading financial institutions have closed their previous recommendations to hold a bullish stance on the yen after the country’s governing party selected Sanae Takaichi as its chief.

In a note called “Getting out of the yen,” one global head for foreign exchange commented:

We went long JPY as part of our strategy but have closed this due to the LDP election outcome. The unexpected win by Takaichi reintroduces significant doubt concerning Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

There is agreement that inflationary pressures exist in Japan, but uncertainty is now going up again about the approach to managing it.

The strategist further cautioned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches the $4,000/oz Mark

The gold price are reaching fresh record highs, today, in its top-performing period since 1979.

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

This shows bullion prices has increased half again from the beginning of the year, heading for its best annual gains since the Iranian Revolution.

Bullion has advanced throughout the year due to multiple reasons, including rising concerns that government debts may be unmanageable.

Sanae Takaichi’s victory in Japan will only have reinforced apprehensions that leaders will attempt to secure growth through higher borrowing and lower interest rates, and rely on inflation to erode the value of new borrowings.

Financial Summary

The Japanese equity market has rallied to unprecedented levels today, with the currency dropping, after the leadership of the LDP went unexpectedly to by fiscal dove Takaichi.

Forecasts that the new leader will be a PM favoring economic stimulus has sparked a rush of positive investment driving the Nikkei 225 share index higher by five percent, adding 2315 points ending at 48,085 points.

However, the currency is heading downward – it dropped nearly two percent relative to the USD to 150.3 yen per dollar.

The incoming leader, who is expected to become Japan’s first female prime minister later this month, is a long-time admirer of Thatcher. Yet even though her social policies are right-leaning in social matters, she takes an un-Thatcherite approach in economic policy, and supports increased public expenditure and easy money policies.

As such, she’s expected to maintain the national effort to stimulate its economy though fiscal spending and reduced borrowing costs, which would lead to rising inflation and more debt.

Thus the weaker yen, as investors anticipate fewer interest rates hikes by Japanese authorities than before.

Japan’s government bond values are also down this session, lifting the interest rate on thirty-year bonds close to all-time highs, on expectations of more government loans and more persistent inflation.

Investors are evaluating to what extent Sanae Takaichi’s plans will mirror the “Abenomics” programme implemented by ex-prime minister Abe.

A brokerage head commented:

Different from previous comments, Takaichi has refrained from talking up Abenomics in the recent vote, but experts understand her core beliefs and her support of Abe’s Three Arrows strategy.

Traders may therefore move to gain understanding on her policies, and how much impact she may be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is seen as a “live” affair with a quarter-point increase considered likely...

Economic Calendar

• 08:30 British Summer Time: European construction data for last month
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: BOE chief Bailey to deliver address at a financial forum this year