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Investor Sentiment following Japan's Political Shift

Foreign exchange experts from major financial institutions have reportedly exited their recommendations for holding a long position regarding the Japanese yen after Japan’s governing party selected Sanae Takaichi as its leader.

In a report called “Leaving yen positions,” a lead strategist for currency analysis commented:

Our strategy was bullish on the yen in our FX Blueprint but have closed this due to the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces too much uncertainty regarding the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The analyst additionally noted that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Nears the $4,000/oz Level

Gold prices are reaching new all-time peaks, once more, in its top-performing period since the late 1970s.

The immediate value of bullion has climbed by 1% or more in recent trading reaching $3,944/oz, approaching the $4000/oz mark.

This means the gold price has increased fifty percent from the beginning of the year, likely to achieve its best annual gains since the Iranian Revolution.

The metal has risen this year because of various drivers, among them increasing fears that government debts are unsustainable.

Sanae Takaichi’s election win in the Japanese election is likely amplifying worries that government officials will attempt to boost output by borrowing more and reduced rates, and rely on inflation to reduce the real value of accumulated debt.

Financial Summary

Tokyo’s bourse has jumped to unprecedented levels in Monday trading, while the yen is plunging, after the top position of the country’s ruling party went unexpectedly to by fiscal dove Takaichi.

Expectations that Sanae Takaichi is likely to be a leader supporting government spending has triggered a rush of positive investment lifting the Tokyo stock index to a 5% gain, adding 2315 points ending at 48,085 points.

But the yen is trending the opposite way – it has fallen nearly two percent against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan in the coming weeks, is a long-time admirer of Thatcher. However, while she holds conservative views regarding social issues, Takaichi takes an un-Thatcherite approach to fiscal policy, and supports a revival of government spending and accommodative central bank measures.

As such, she’s expected to persist with Japan’s push to stimulate its economy through public investment and cheap credit, which would lead to increased price pressures and increased borrowing.

Hence the falling currency, as markets predict reduced rate increases in Tokyo relative to previous forecasts.

The nation’s debt securities are also down this session, lifting the return on long-term Japanese bonds close to peak levels, because of predictions of higher borrowing and more persistent inflation.

The markets are assessing to what extent Sanae Takaichi’s policies will mirror the policies of Shinzo Abe advocated by previous leader Abe.

A brokerage head explained:

Different from previous comments, the leader has avoided from promoting Abenomics in the recent vote, but experts understand her core beliefs and her support of Shinzo Abe’s Three Arrows philosophy.

Traders may therefore move for more information on her policies, as well as exactly how influential she could be in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a “live” affair and a 25bp hike seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 09:30 BST: UK construction PMI for September
• 6.30pm BST: Bank of England governor the BOE’s Andrew Bailey to deliver address at a financial forum this year