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Investor Sentiment to the Japanese Political Shift

Currency strategists at major investment firms have terminated their strategies for holding a long position regarding Japan’s currency after the country’s leading political group chose Sanae Takaichi as the new leader.

In a note named “Getting out of the yen,” one global head of FX research stated:

We went long JPY as part of our strategy but have closed this following the LDP election outcome. The unexpected win by Takaichi reintroduces renewed unpredictability around Japanese economic goals as well as the schedule for interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue for Japan, but doubts are resurfacing about the approach to managing it.

The strategist further cautioned evidence of political control across Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Nears $4,000 per ounce Mark

The gold price are reaching unprecedented levels, today, in its top-performing period in over four decades.

The current price of bullion has surged more than 1 percent this morning to $3,944 per ounce, approaching the $4,000 threshold.

This indicates gold’s value has increased by 50% from the beginning of the year, heading for its best annual gains since the late 1970s.

The metal has risen this year because of various drivers, among them growing worries that government debts may be unmanageable.

The new leader’s success in the party vote will only have reinforced worries that government officials will attempt to stimulate the economy via increased debt and reduced rates, and rely on inflation to erode the value of accumulated debt.

Market Overview

Tokyo’s bourse has rallied to unprecedented levels today, as the yen falls, following the leadership of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that the new leader will become a leader supporting government spending has ignited a surge of optimistic trading driving the Nikkei 225 share index up by 5%, as it gained over 2300 points ending at 48,085 points.

Yet the Japanese yen is trending in the other direction – it has fallen about 2 percent versus the dollar at 150.3¥/$.

The incoming leader, set to be the nation’s initial woman PM in the coming weeks, has long admired of the former UK leader. However, while her social policies are right-leaning regarding social issues, Takaichi adopts a different strategy to fiscal policy, and supports higher state investment and accommodative central bank measures.

As such, analysts anticipate to maintain the national effort to boost economic growth though fiscal spending and reduced borrowing costs, likely resulting in rising inflation and more debt.

As a result the falling currency, as investors anticipate fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities are also down in Monday trading, pushing up the yield on long-term Japanese bonds near to all-time highs, because of predictions of higher borrowing and sustained inflationary pressures.

Investors will be calculating how closely the new leader’s plans will mirror the Abenomics strategy pushed by previous leader Shinzo Abe.

One analyst explained:

In contrast to last year, Takaichi has refrained from highlighting Abenomics in this LDP leadership campaign, but most know her underlying stance and her approval of the former PM’s three-pillar approach.

Traders may therefore move to gain understanding on her policies, plus the degree of influence she might become in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is seen as a “live” affair with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: European construction data for last month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: BOE chief Andrew Bailey to speak at Scotland’s Global Investment Summit this year