🔗 Share this article

Market Reactions following Japan's Leadership Election

Currency strategists at leading investment firms have reportedly closed their positions for holding an optimistic view regarding Japan’s currency following Japan’s governing party elected Takaichi as the new chief.

In a note named “Getting out of the yen,” one lead strategist for foreign exchange explained:

We held a long yen position as part of our strategy but have closed this due to the LDP election outcome. The unexpected win by Takaichi creates too much uncertainty concerning the nation’s policy focus as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The analyst further cautioned indicators of government influence within Japan (where state authorities influence the central bank’s actions) represent a downside risk.

Gold Closes In On $4,000 per ounce Level

Bullion values are reaching new all-time peaks, again, in its top-performing period in over four decades.

The immediate value of gold has surged more than 1 percent today to $3,944 per ounce, approaching the $4000/oz mark.

This means bullion prices has jumped half again since January 1st, heading for its strongest yearly performance since the Iranian Revolution.

The metal has risen in recent months by several factors, among them rising concerns that public borrowing cannot be maintained.

Sanae Takaichi’s election win in Japan is likely amplifying apprehensions that government officials will attempt to secure growth through higher borrowing and reduced rates, and rely on inflation to diminish the worth of new borrowings.

Financial Summary

Tokyo’s bourse has surged to an all-time peak this morning, while the yen is plunging, following the chief role of the country’s ruling party was unexpectedly secured by stimulus supporter Takaichi.

Expectations that Takaichi is likely to be a pro-stimulus prime minister has ignited a surge of optimistic trading driving the Tokyo stock index to a 5% gain, rising by 2315 points to finish at just over 48,000.

Yet the Japanese yen is heading the opposite way – it dropped nearly two percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be Japan’s first female prime minister soon, is a known fan of the former UK leader. Yet even though she is conservative on social policy, the new leader follows a contrasting path to fiscal policy, and promotes increased public expenditure and easy money policies.

Consequently, markets predict to maintain Japan’s push to spur activity though fiscal spending and reduced borrowing costs, likely resulting in rising inflation and more debt.

Thus the falling currency, with traders expecting less monetary tightening by Japanese authorities relative to previous forecasts.

Japan’s government bond values have also fallen this session, lifting the interest rate on its 30-year debt close to all-time highs, on expectations of more government loans and sustained inflationary pressures.

Traders are assessing to what extent Takaichi’s proposals will resemble the Abenomics strategy implemented by former PM Abe.

A brokerage head explained:

Different from previous comments, Takaichi has refrained from highlighting the Abenomics program in the recent vote, but experts understand her underlying stance and her support of the former PM’s Three Arrows approach.

Traders may therefore move to gain understanding on her policies, plus the degree of influence she might become in forming the central bank’s decisions, with the Bank of Japan’s October session is considered a key event and a rate rise potentially on the table...

Economic Calendar

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 09:30 BST: British construction figures for the last month
• 6.30pm BST: Bank of England governor Andrew Bailey to deliver address at an investment conference this year