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Market Reactions following the Japanese Leadership Election

FX analysts at leading banks have terminated their recommendations to hold a bullish stance on Japan’s currency following Japan’s ruling party selected Takaichi as its head.

In a note named “Getting out of the yen,” one global head for foreign exchange stated:

We held a long yen position in our FX Blueprint but have now exited due to the weekend’s election result. Takaichi’s unforeseen success reintroduces too much uncertainty regarding Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem for Japan, but questions are mounting regarding how it will be addressed.

The strategist also warned evidence of political control across Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Nears the $4,000/oz Threshold

Gold prices are achieving new all-time peaks, today, during its best performance since 1979.

The immediate value of bullion has jumped by over 1% today at $3,944 an ounce, as it closes in on the $4,000 threshold.

This indicates bullion prices has jumped by 50% since January 1st, heading for its strongest yearly performance since the Iranian Revolution.

Bullion has advanced this year because of various drivers, including growing worries that national debt levels may be unmanageable.

Takaichi’s success in the party vote will only have reinforced apprehensions that government officials will attempt to stimulate the economy through higher borrowing and cheaper credit, and rely on inflation to erode the value of the resulting debt.

Market Overview

The Japanese equity market has surged to unprecedented levels this morning, as the yen falls, following the top position of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that the new leader is likely to be a leader supporting government spending has sparked a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, adding more than 2300 points to close at 48,085 points.

However, the currency is trending the opposite way – it dropped almost 2% relative to the USD reaching 150.3 against the greenback.

The incoming leader, who should become the nation’s initial woman PM later this month, has long admired of the former UK leader. However, while her social policies are right-leaning on social policy, she follows a contrasting path in economic policy, and supports a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to maintain the national effort to boost economic growth though fiscal spending and reduced borrowing costs, potentially causing rising inflation and increased borrowing.

As a result yen depreciation, as markets predict fewer interest rates hikes in Tokyo compared to earlier expectations.

Japanese long-term bond prices are also down today, pushing up the interest rate on thirty-year bonds approaching all-time highs, on expectations of higher borrowing and sustained inflationary pressures.

The markets are assessing how closely Sanae Takaichi’s plans will resemble the “Abenomics” programme advocated by previous leader Abe.

A market expert commented:

In contrast to last year, she has not engaged from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Abe’s three-arrow approach.

Investors might thus seek to obtain clarity regarding her stance, and how much impact she could be in shaping monetary policy, given the October BoJ meeting is viewed as a “live” affair and a 25bp hike potentially on the table...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: UK building sector data for September
• 18:30 BST: BOE chief Andrew Bailey to deliver address at a financial forum this year