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Investor Sentiment to Japan's Political Shift

FX analysts at prominent banks have terminated their previous positions for holding a long position on Japan’s currency following Japan’s governing party selected Sanae Takaichi to be its leader.

In commentary titled “Leaving yen positions,” a chief of FX research stated:

Our strategy was bullish on the yen in our FX Blueprint but have now exited following the LDP election outcome. The unexpected win by Takaichi brings back significant doubt around Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem in Japan, but questions are mounting regarding how it will be addressed.

The analyst also warned indicators of government influence within Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches $4,000 per ounce Mark

Gold prices are hitting unprecedented levels, today, in its top-performing period in over four decades.

The spot price of the precious metal has climbed by over 1% today reaching $3,944/oz, nearing the $4,000 threshold.

This indicates the gold price has surged half again from the beginning of the year, heading for its top annual returns since the late 1970s.

Bullion has advanced in recent months because of various drivers, among them increasing fears that government debts may be unmanageable.

The new leader’s election win in Japan is likely amplifying worries that government officials could seek to secure growth via increased debt and cheaper credit, and rely on inflation to reduce the real value of the resulting debt.

Market Overview

Tokyo’s bourse has rallied to an all-time peak in Monday trading, while the yen is plunging, after the top position of the country’s ruling party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Expectations that Sanae Takaichi will be a PM favoring economic stimulus has sparked a rush of positive investment that has pushed the Nikkei 225 share index higher by five percent, rising by more than 2300 points to close at 48,085 points.

Yet the Japanese yen is trending downward – it has fallen nearly two percent versus the dollar to 150.3 yen per dollar.

Takaichi, who is expected to become Japan’s first female prime minister soon, has long admired of Thatcher. But although her social policies are right-leaning on social policy, she follows a contrasting path to fiscal policy, and promotes a revival of government spending and accommodative central bank measures.

As such, analysts anticipate to continue the national effort to boost economic growth through public investment and lower interest rates, which would lead to increased price pressures and more debt.

Hence the weaker yen, as markets predict less monetary tightening from the Bank of Japan than before.

The nation’s debt securities have also fallen in Monday trading, driving higher the yield on its 30-year debt near to record highs, on expectations of higher borrowing and sustained inflationary pressures.

Investors are assessing to what extent the new leader’s proposals will mirror the “Abenomics” programme implemented by previous leader Shinzo Abe.

A market expert explained:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but experts understand her core beliefs and her support of Shinzo Abe’s Three Arrows strategy.

Traders may therefore move to gain understanding on that position, plus the degree of influence she might become in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is considered a potential turning point and a 25bp hike potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: Central bank head Bailey to give keynote speech at an investment conference this year