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Market Reactions following Japan's Leadership Election

FX analysts at major investment firms have closed their positions to hold a long position on the yen following the country’s governing party selected Sanae Takaichi to be its leader.

In a note called “Getting out of the yen,” one lead strategist for foreign exchange explained:

We held a long yen position within our portfolio but have now exited following the LDP election outcome. The unexpected win by Takaichi creates renewed unpredictability regarding Japanese economic goals as well as the schedule for interest rate increases by the Bank of Japan.

Experts agree that inflationary pressures exist within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist additionally noted indicators of government influence in Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Approaches the $4,000/oz Threshold

The gold price are achieving unprecedented levels, today, during its best performance since the late 1970s.

The immediate value of the precious metal has climbed more than 1 percent today at $3,944 an ounce, nearing the $4,000 threshold.

This shows 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 this year by several factors, such as growing worries that national debt levels cannot be maintained.

Sanae Takaichi’s victory in the Japanese election is likely amplifying concerns that government officials may try to stimulate the economy through higher borrowing and cheaper credit, and rely on inflation to diminish the worth of accumulated debt.

Market Overview

Japan’s stock market has surged to an all-time peak this morning, while the yen is plunging, after the leadership of the LDP was surprisingly won by spending advocate Sanae Takaichi.

Forecasts that the new leader will become a leader supporting government spending has ignited a surge of optimistic trading lifting the Tokyo stock index to a 5% gain, as it gained 2315 points ending at just over 48,000.

But the yen is heading in the other direction – it’s down nearly two percent relative to the USD at 150.3¥/$.

Takaichi, who is expected to become Japan’s first female prime minister soon, is a known fan of the former UK leader. But although her social policies are right-leaning regarding social issues, she follows a contrasting path to fiscal policy, and promotes a revival of government spending and loose monetary policy.

As such, markets predict to persist with Japan’s push to boost economic growth through public investment and cheap credit, potentially causing increased price pressures and increased borrowing.

Thus yen depreciation, as investors anticipate fewer interest rates hikes in Tokyo compared to earlier expectations.

Japanese long-term bond prices are also down this session, lifting the yield on its 30-year debt approaching peak levels, because of predictions of higher borrowing and lasting price increases.

Traders are evaluating to what extent the new leader’s plans will resemble the “Abenomics” programme pushed by former PM Shinzo Abe.

A market expert commented:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy during the party election, but most know her fundamental position and her appreciation of Shinzo Abe’s three-arrow approach.

Markets could then push to gain understanding regarding her stance, and how much impact she might become in directing monetary policy, with the Bank of Japan’s October session is seen as a “live” affair and a rate rise seen as a real possibility...

Economic Calendar

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: Central bank head Andrew Bailey to speak at a financial forum this year