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Investor Sentiment to the Japanese Leadership Election

Currency strategists from leading banks have terminated their previous positions to hold a long position on the yen following the country’s ruling party selected Sanae Takaichi as the new chief.

In a note titled “Exiting the yen,” one global head for currency analysis stated:

We held a long yen position as part of our strategy but have now exited following the weekend’s election result. The unexpected win by Takaichi reintroduces significant doubt regarding the nation’s policy focus and the timing of BoJ monetary tightening.

There is agreement that inflationary pressures exist within the Japanese economy, but questions are mounting on how it will be dealt with.

The strategist further cautioned indicators of government influence within Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Closes In On $4,000 per ounce Level

The gold price are achieving unprecedented levels, again, during its best performance in over four decades.

The current price of the precious metal has jumped by 1% or more today at $3,944 an ounce, nearing the $4,000 threshold.

This means the gold price has increased by 50% since January 1st, likely to achieve its strongest yearly performance in over 45 years.

Gold has been driven higher throughout the year due to multiple reasons, including increasing fears that government debts may be unmanageable.

Takaichi’s election win in Japan is likely amplifying apprehensions that government officials may try to secure growth through higher borrowing and cheaper credit, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

Japan’s stock market has surged to a record high this morning, while the yen is plunging, following the leadership of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Expectations that Takaichi will become a leader supporting government spending has sparked a rush of positive investment lifting the Nikkei 225 share index higher by five percent, adding more than 2300 points to finish at just over 48,000.

However, the currency is very much moving downward – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

Takaichi, who is expected to become Japan’s first female prime minister later this month, is a long-time admirer of Thatcher. However, while her social policies are right-leaning regarding social issues, the new leader takes an un-Thatcherite approach on budget matters, and has advocate a revival of government spending and accommodative central bank measures.

Consequently, analysts anticipate to persist with Japan’s push to stimulate its economy via government outlays and lower interest rates, which would lead to higher inflation and more debt.

Hence the falling currency, as investors anticipate fewer interest rates hikes by Japanese authorities than before.

Japan’s government bond values are also down this session, driving higher the return on long-term Japanese bonds near to record highs, on expectations of higher borrowing and lasting price increases.

Traders are evaluating how closely Sanae Takaichi’s proposals will resemble the “Abenomics” programme advocated by ex-prime minister Shinzo Abe.

A brokerage head commented:

Different from previous comments, the leader has avoided from highlighting Abenomics during the party election, but most know her core beliefs and her support of Abe’s three-pillar strategy.

Markets could then push to obtain clarity on that position, plus the degree of influence she could be in forming monetary policy, given the October BoJ meeting is viewed as a “live” affair and a 25bp hike considered likely...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: Bank of England governor Bailey to give keynote speech at an investment conference this year