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Market Reactions following Japan's Ruling Party Vote

Currency strategists from major financial institutions have terminated their previous positions to hold an optimistic view on Japan’s currency after Japan’s governing party chose Sanae Takaichi as its chief.

In commentary titled “Leaving yen positions,” one chief for currency analysis commented:

We held a long yen position within our portfolio but have now exited after the LDP election outcome. Takaichi’s unforeseen success creates significant doubt around Japan’s policy priorities and the expected date of BoJ monetary tightening.

There is agreement that rising prices are an issue in Japan, but doubts are resurfacing regarding how it will be addressed.

The expert additionally noted indicators of government influence across Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Approaches the $4,000 Level

Bullion values are achieving fresh record highs, today, in its top-performing period since 1979.

The immediate value of bullion has climbed more than 1 percent in recent trading reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This means bullion prices has surged half again since the start of January, heading for its best annual gains since the late 1970s.

Gold has been driven higher throughout the year because of various drivers, including rising concerns that national debt levels cannot be maintained.

Takaichi’s success in the Japanese election has further strengthened worries that leaders will attempt to secure growth by borrowing more and cheaper credit, and depend on rising prices to diminish the worth of new borrowings.

Market Overview

The Japanese equity market has rallied to unprecedented levels today, while the yen is plunging, following the top position of the governing party was surprisingly won by spending advocate Sanae Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has ignited a surge of optimistic trading that has pushed Japan’s benchmark index to a 5% gain, as it gained 2315 points to close at just over 48,000.

Yet the Japanese yen is very much moving the opposite way – it’s down almost 2% versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, set to be the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. But although her social policies are right-leaning on social policy, Takaichi takes an un-Thatcherite approach on budget matters, and supports higher state investment and accommodative central bank measures.

Therefore, markets predict to persist with the national effort to boost economic growth through public investment and cheap credit, potentially causing increased price pressures and more debt.

Thus yen depreciation, with traders expecting reduced rate increases by Japanese authorities compared to earlier expectations.

The nation’s debt securities have also fallen today, lifting the interest rate on thirty-year bonds close to peak levels, due to forecasts of more government loans and more persistent inflation.

The markets are evaluating the degree to which Takaichi’s plans will mirror the “Abenomics” programme implemented by former PM Shinzo Abe.

A brokerage head explained:

In contrast to last year, the leader has avoided from highlighting Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her support of Shinzo Abe’s Three Arrows strategy.

Markets could then push for more information on that position, and how much impact she may be in shaping the BoJ’s policy thinking, given the October BoJ meeting is considered a key event with a quarter-point increase potentially on the table...

Economic Calendar

• 8.30am BST: European construction data for the previous month
• 9.30am BST: UK building sector data for September
• 18:30 BST: Central bank head Bailey to give keynote speech at an investment conference this year