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Market Reactions to Japan's Leadership Election

Currency strategists from major banks have reportedly exited their strategies for holding a long position on the yen following Japan’s leading political group selected Takaichi as its chief.

In commentary titled “Exiting the yen,” one global head for foreign exchange commented:

Our strategy was bullish on the yen as part of our strategy but are now getting out following the LDP election outcome. Sanae Takaichi’s surprise victory brings back renewed unpredictability around Japan’s policy priorities and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist for Japan, but questions are mounting regarding how it will be addressed.

The strategist additionally noted evidence of political control across Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Approaches the $4,000 Threshold

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

The spot price of the precious metal has climbed by 1% or more in recent trading to $3,944 per ounce, approaching the $4,000 per ounce level.

This shows the gold price has increased fifty percent from the beginning of the year, likely to achieve its top annual returns in over 45 years.

Gold has been driven higher throughout the year by several factors, among them increasing fears that national debt levels may be unmanageable.

Sanae Takaichi’s election win in Japan is likely amplifying apprehensions that leaders will attempt to secure growth through higher borrowing and cheaper credit, and depend on rising prices to erode the value of new borrowings.

Financial Summary

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

Expectations that Sanae Takaichi will become a pro-stimulus prime minister has ignited a wave of enthusiastic buying driving the Tokyo stock index to a 5% gain, rising by more than 2300 points to finish at just over 48,000.

But the yen is very much moving downward – it has fallen about 2 percent against the US dollar at 150.3¥/$.

Takaichi, who should become the nation’s initial woman PM in the coming weeks, is a known fan of Margaret Thatcher. But although she holds conservative views on social policy, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate a revival of government spending and accommodative central bank measures.

As such, she’s expected to persist with the national effort to spur activity though fiscal spending and lower interest rates, potentially causing rising inflation and increased borrowing.

Hence the weaker yen, with traders expecting fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined in Monday trading, driving higher the interest rate on thirty-year bonds near to record highs, on expectations of more government loans and lasting price increases.

Traders will be calculating how closely Takaichi’s plans will resemble the policies of Shinzo Abe pushed by previous leader Shinzo Abe.

One analyst explained:

In contrast to last year, Takaichi has refrained from highlighting the Abenomics program in this LDP leadership campaign, but most know her underlying stance and her support of Abe’s Three Arrows approach.

Traders may therefore move to gain understanding on that position, and how much impact she may be in forming the central bank’s decisions, given the October BoJ meeting is seen as a “live” affair and a 25bp hike seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: BOE chief Bailey to give keynote speech at a financial forum this year