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Investor Sentiment following the Japanese Political Shift

FX analysts at major investment firms have reportedly terminated their previous positions to hold an optimistic view regarding Japan’s currency after the country’s governing party selected Sanae Takaichi as the new head.

In commentary named “Getting out of the yen,” one lead strategist for currency analysis stated:

We held a long yen position within our portfolio but have now exited after the LDP election outcome. Takaichi’s unforeseen success reintroduces too much uncertainty around Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue within the Japanese economy, but questions are mounting on how it will be dealt with.

The strategist additionally noted indicators of government influence within Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

Bullion values are reaching fresh record highs, today, in its strongest year since 1979.

The current price of gold has climbed more than 1 percent in recent trading to $3,944 per ounce, nearing the $4000/oz mark.

This means gold’s value has surged half again since January 1st, heading for its top annual returns in over 45 years.

Gold has been driven higher throughout the year due to multiple reasons, among them increasing fears that public borrowing may be unmanageable.

Sanae Takaichi’s success in the Japanese election is likely amplifying concerns that government officials will attempt to secure growth through higher borrowing and reduced rates, and rely on inflation to erode the value of accumulated debt.

Financial Summary

Tokyo’s bourse has surged to unprecedented levels today, as the yen falls, following the top position of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a leader supporting government spending has triggered a rush of positive investment driving the Nikkei 225 share index higher by five percent, as it gained more than 2300 points to close at just over 48,000.

Yet the Japanese yen is heading in the other direction – it has fallen nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, set to be the nation’s initial woman PM soon, is a known fan of Thatcher. But although her social policies are right-leaning regarding social issues, she follows a contrasting path on budget matters, and supports a revival of government spending and accommodative central bank measures.

As such, markets predict to persist with the country’s drive to stimulate its economy via government outlays and lower interest rates, which would lead to rising inflation and increased borrowing.

Hence the falling currency, as investors anticipate less monetary tightening by Japanese authorities relative to previous forecasts.

The nation’s debt securities are also down this session, driving higher the yield on thirty-year bonds approaching peak levels, due to forecasts of higher borrowing and more persistent inflation.

The markets will be calculating the degree to which Sanae Takaichi’s proposals will echo the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst commented:

Different from previous comments, the leader has avoided from highlighting Abenomics during the party election, but many are aware her core beliefs and her support of Abe’s three-arrow approach.

Investors might thus seek to gain understanding regarding her stance, and how much impact she may be in forming monetary policy, ahead of the BoJ’s next meeting is considered a key event with a quarter-point increase considered likely...

Market Agenda

• 08:30 British Summer Time: European construction data for last month
• 9.30am BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to speak at an investment conference this year