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Financial Market Response to the Japanese Leadership Election

Currency strategists from leading investment firms have reportedly closed their positions for holding a bullish stance on Japan’s currency following Japan’s leading political group elected Sanae Takaichi to be its chief.

In a note titled “Exiting the yen,” one lead strategist for currency analysis explained:

Our strategy was bullish on the yen within our portfolio but have now exited after the LDP election outcome. The unexpected win by Takaichi reintroduces too much uncertainty regarding the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

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

The expert further cautioned indicators of government influence in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

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

Bullion values are hitting unprecedented levels, today, in its strongest year since 1979.

The current price of gold has climbed by 1% or more in recent trading to $3,944 per ounce, nearing the $4,000 per ounce level.

This indicates bullion prices has surged half again since the start of January, likely to achieve its best annual gains in over 45 years.

Gold has been driven higher this year due to multiple reasons, including rising concerns that government debts may be unmanageable.

The new leader’s success in Japan is likely amplifying concerns that leaders will attempt to secure growth via increased debt and cheaper credit, and rely on inflation to erode the value of accumulated debt.

Market Overview

Japan’s stock market has rallied to unprecedented levels this morning, while the yen is plunging, after the chief role of the country’s ruling party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that the new leader is likely to be a leader supporting government spending has triggered a rush of positive investment driving the Nikkei 225 share index higher by five percent, as it gained 2315 points ending at 48,085 points.

However, the currency is heading downward – it dropped almost 2% against the US dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become Japan’s first female prime minister soon, is a known fan of the former UK leader. However, while she is conservative on social policy, the new leader adopts a different strategy on budget matters, and promotes increased public expenditure and easy money policies.

As such, markets predict to persist with Japan’s push to spur activity though fiscal spending and lower interest rates, which would lead to higher inflation and more debt.

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

Japanese long-term bond prices are also down in Monday trading, driving higher the return on its 30-year debt approaching peak levels, on expectations of more government loans and more persistent inflation.

Investors are assessing the degree to which Sanae Takaichi’s plans will resemble the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

A market expert explained:

Different from previous comments, the leader has avoided from highlighting the Abenomics program in the recent vote, but experts understand her core beliefs and her approval of the former PM’s three-arrow philosophy.

Markets could then push to obtain clarity regarding her stance, and how much impact she could be in forming monetary policy, ahead of the BoJ’s next meeting is considered a key event and a 25bp hike considered likely...

Today’s Schedule

• 8.30am BST: European construction data for September
• 9.30am BST: British construction figures for the last month
• 18:30 BST: Central bank head Andrew Bailey to give keynote speech at a financial forum this year