Japanese Currency Falls while Nikkei Soars to All-Time High After Sanae Takaichi’s Leadership Win; Gold Nears $4,000 Level

Market Reactions to the Japanese Political Shift

FX analysts from major investment firms have exited their positions for holding a bullish stance on the Japanese yen after Japan’s ruling party elected Sanae Takaichi to be its leader.

In a note titled “Exiting the yen,” one chief of FX research explained:

We went long JPY within our portfolio but have now exited due to the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty around Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue for Japan, but doubts are resurfacing about the approach to managing it.

The analyst further cautioned that signs of fiscal dominance within Japan (where the government controls the central bank’s actions) pose a potential danger.

Gold Nears the $4,000/oz Level

The gold price are hitting new all-time peaks, again, in its strongest year since the late 1970s.

The current price of the precious metal has surged by over 1% today at $3,944 an ounce, approaching the $4,000 per ounce level.

This means bullion prices has increased fifty percent from the beginning of the year, likely to achieve its best annual gains in over 45 years.

The metal has risen in recent months due to multiple reasons, among them increasing fears that public borrowing cannot be maintained.

Sanae Takaichi’s victory in Japan has further strengthened concerns that leaders may try to boost output through higher borrowing and cheaper credit, and rely on inflation to erode the value of the resulting debt.

Trading Update

Japan’s stock market has surged to unprecedented levels this morning, as the yen falls, following the leadership of the country’s ruling party was surprisingly won by spending advocate Sanae Takaichi.

Forecasts that Sanae Takaichi is likely to be a pro-stimulus prime minister has sparked a wave of enthusiastic buying driving Japan’s benchmark index up by 5%, adding 2315 points to finish at 48,085.

Yet the Japanese yen is very much moving in the other direction – it has fallen about 2 percent against the US dollar reaching 150.3 against the greenback.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, has long admired of Margaret Thatcher. Yet even though her social policies are right-leaning in social matters, the new leader follows a contrasting path to fiscal policy, and supports increased public expenditure and easy money policies.

Consequently, markets predict to maintain Japan’s push to spur activity though fiscal spending and reduced borrowing costs, which would lead to higher inflation and increased borrowing.

Hence the weaker yen, with traders expecting fewer interest rates hikes in Tokyo than before.

The nation’s debt securities have also fallen this session, driving higher the return on long-term Japanese bonds close to peak levels, on expectations of more government loans and sustained inflationary pressures.

Investors are evaluating how closely the new leader’s plans will echo the “Abenomics” programme implemented by previous leader Shinzo Abe.

A brokerage head commented:

In contrast to last year, she has not engaged from talking up the Abenomics program during the party election, but experts understand her underlying stance and her appreciation of Shinzo Abe’s three-arrow strategy.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she could be in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a potential turning point and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for September
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: Bank of England governor Andrew Bailey to speak at an investment conference this year