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Financial Market Response following Japan's Leadership Election

Foreign exchange experts at major financial institutions have reportedly closed their previous recommendations to hold a long position on Japan’s currency after the country’s governing party elected Sanae Takaichi as its head.

In a note titled “Exiting the yen,” one chief for foreign exchange stated:

We held a long yen position in our FX Blueprint but have closed this following the party leadership vote. Sanae Takaichi’s surprise victory creates renewed unpredictability around the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but questions are mounting about the approach to managing it.

The expert also warned evidence of political control in Japan (where state authorities influence the central bank’s actions) pose a potential danger.

Gold Closes In On $4,000 per ounce Level

The gold price are reaching unprecedented levels, today, in its strongest year since 1979.

The current price of gold has jumped by 1% or more in recent trading at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This means bullion prices has surged fifty percent since January 1st, on track for its strongest yearly performance since the Iranian Revolution.

Bullion has advanced throughout the year because of various drivers, such as increasing fears that government debts cannot be maintained.

The new leader’s election win in the Japanese election is likely amplifying apprehensions that government officials could seek to stimulate the economy by borrowing more and reduced rates, and use inflation to erode the value of accumulated debt.

Financial Summary

Japan’s stock market has jumped to a record high today, as the yen falls, following the top position of the country’s ruling party went unexpectedly to by stimulus supporter Sanae Takaichi.

Forecasts that Sanae Takaichi will be a pro-stimulus prime minister has triggered a rush of positive investment driving the Tokyo stock index to a 5% gain, adding over 2300 points to close at 48,085 points.

Yet the Japanese yen is trending downward – it’s down almost 2% versus the dollar to 150.3 yen per dollar.

Takaichi, set to be Japan’s first female prime minister later this month, is a long-time admirer of Margaret Thatcher. But although she holds conservative views in social matters, the new leader takes an un-Thatcherite approach in economic policy, and supports increased public expenditure and easy money policies.

Consequently, markets predict to persist with Japan’s push to stimulate its economy via government outlays and cheap credit, likely resulting in higher inflation and greater borrowing.

Hence the falling currency, as investors anticipate fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities have also fallen this session, lifting the yield on thirty-year bonds close to record highs, because of predictions of more government loans and more persistent inflation.

The markets are evaluating how closely Takaichi’s proposals will echo the Abenomics strategy implemented by former PM Shinzo Abe.

One analyst commented:

In contrast to last year, Takaichi has refrained from highlighting the three-arrow strategy in the recent vote, but most know her core beliefs and her support of the former PM’s three-pillar approach.

Markets could then push for more information regarding her stance, and how much impact she could be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a “live” affair with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: European construction data for September
• 9.30am BST: UK construction PMI for the last month
• 6.30pm BST: Bank of England governor Andrew Bailey to deliver address at a financial forum this year