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Financial Market Response to the Japanese Ruling Party Vote

Foreign exchange experts from major financial institutions have terminated their previous positions for holding a long position regarding Japan’s currency following Japan’s governing party chose Sanae Takaichi as its chief.

In a report named “Getting out of the yen,” one chief of FX research commented:

We went long JPY in our FX Blueprint but are now getting out after the party leadership vote. The unexpected win by Takaichi reintroduces significant doubt around the nation’s policy focus and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist further cautioned that signs of fiscal dominance in Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Nears $4,000 per ounce Threshold

The gold price are reaching unprecedented levels, once more, during its best performance since 1979.

The current price of the precious metal has surged by 1% or more today to $3,944 per ounce, nearing the $4,000 per ounce level.

This indicates bullion prices has jumped half again since the start of January, likely to achieve its best annual gains since the late 1970s.

The metal has risen throughout the year because of various drivers, including growing worries that public borrowing may be unmanageable.

Sanae Takaichi’s election win in the Japanese election will only have reinforced worries that politicians may try to stimulate the economy by borrowing more and reduced rates, and use inflation to erode the value of accumulated debt.

Financial Summary

The Japanese equity market has surged to an all-time peak today, with the currency dropping, after the chief role of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that the new leader will be a leader supporting government spending has sparked a surge of optimistic trading driving the Nikkei 225 share index higher by five percent, rising by over 2300 points to finish at 48,085 points.

However, the currency is very much moving in the other direction – it’s down almost 2% relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the nation’s initial woman PM in the coming weeks, has long admired of the former UK leader. But although she is conservative regarding social issues, she follows a contrasting path in economic policy, and supports higher state investment and loose monetary policy.

Consequently, markets predict to maintain the national effort to boost economic growth through public investment and reduced borrowing costs, which would lead to rising inflation and increased borrowing.

As a result the falling currency, with traders expecting fewer interest rates hikes by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices are also down this session, driving higher the yield on long-term Japanese bonds close to all-time highs, on expectations of increased debt issuance and lasting price increases.

Traders are assessing how closely the new leader’s plans will echo the “Abenomics” programme advocated by previous leader Shinzo Abe.

A market expert noted:

In contrast to last year, the leader has avoided from highlighting Abenomics during the party election, but most know her fundamental position and her appreciation of the former PM’s Three Arrows philosophy.

Markets could then push to gain understanding regarding her stance, as well as exactly how influential she could be in shaping monetary policy, ahead of the BoJ’s next meeting is seen as a “live” affair and a rate rise seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: European construction data for the previous month
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: BOE chief Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit this year