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Investor Sentiment to Japan's Ruling Party Vote

Foreign exchange experts at major investment firms have closed their recommendations to hold an optimistic view on the Japanese yen following Japan’s ruling party selected Sanae Takaichi as the new leader.

In commentary titled “Getting out of the yen,” one chief of FX research stated:

We held a long yen position as part of our strategy but have now exited due to the party leadership vote. Sanae Takaichi’s surprise victory brings back significant doubt regarding the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem in Japan, but questions are mounting on how it will be dealt with.

The strategist further cautioned that signs of fiscal dominance in Japan (where the government controls the BoJ’s moves) represent a downside risk.

Gold Approaches $4,000 per ounce Level

The gold price are hitting unprecedented levels, again, in its strongest year since 1979.

The current price of the precious metal has surged more than 1 percent this morning to $3,944 per ounce, nearing the $4000/oz mark.

This means bullion prices has surged fifty percent since January 1st, on track for its strongest yearly performance since the late 1970s.

Gold has been driven higher throughout the year by several factors, among them rising concerns that government debts may be unmanageable.

The new leader’s success in the party vote will only have reinforced concerns that leaders could seek to boost output via increased debt and lower interest rates, and depend on rising prices to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has surged to unprecedented levels this morning, as the yen falls, after the chief role of the country’s ruling party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Expectations that Takaichi will become a leader supporting government spending has ignited a rush of positive investment driving the Nikkei 225 share index higher by five percent, as it gained 2315 points to close at 48,085 points.

But the yen is very much moving the opposite way – it’s down nearly two percent relative to the USD reaching 150.3 against the greenback.

Takaichi, who is expected to become Japan’s first female prime minister later this month, is a long-time admirer of Margaret Thatcher. Yet even though she holds conservative views regarding social issues, Takaichi adopts a different strategy to fiscal policy, and has advocate a revival of government spending and loose monetary policy.

As such, markets predict to continue the national effort to boost economic growth via government outlays and cheap credit, potentially causing higher inflation and increased borrowing.

Thus the weaker yen, as markets predict less monetary tightening by Japanese authorities than before.

Japan’s government bond values are also down today, pushing up the yield on thirty-year bonds close to all-time highs, on expectations of higher borrowing and sustained inflationary pressures.

The markets are evaluating to what extent Sanae Takaichi’s policies will echo the Abenomics strategy pushed by former PM Shinzo Abe.

A market expert commented:

In contrast to last year, she has not engaged from talking up the three-arrow strategy in this LDP leadership campaign, but experts understand her fundamental position and her support of Shinzo Abe’s three-arrow philosophy.

Markets could then push for more information on her policies, as well as exactly how influential she might become in shaping the BoJ’s policy thinking, given the October BoJ meeting is considered a potential turning point with a quarter-point increase seen as a real possibility...

Market Agenda

• 8:30 AM UK time: European construction data for the previous month
• 9:30 AM UK time: UK building sector data for September
• 6:30 PM UK time: Central bank head Andrew Bailey to give keynote speech at a financial forum this year