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Market Reactions following the Japanese Political Shift

Currency strategists from major investment firms have terminated their previous positions for holding an optimistic view on the Japanese yen following the country’s governing party elected Sanae Takaichi to be its head.

In a note titled “Exiting the yen,” one chief for foreign exchange commented:

We went long JPY as part of our strategy but have now exited due to the weekend’s election result. Sanae Takaichi’s surprise victory brings back significant doubt concerning Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem in Japan, but doubts are resurfacing about the approach to managing it.

The strategist additionally noted evidence of political control across Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Approaches $4,000 per ounce Level

The gold price are reaching fresh record highs, today, in its top-performing period since 1979.

The current price of the precious metal has jumped by over 1% in recent trading at $3,944 an ounce, approaching the $4,000 threshold.

This indicates bullion prices has jumped fifty percent from the beginning of the year, heading for its strongest yearly performance in over 45 years.

The metal has risen this year by several factors, such as rising concerns that national debt levels are unsustainable.

Sanae Takaichi’s election win in Japan has further strengthened apprehensions that leaders could seek to boost output via increased debt and cheaper credit, and use inflation to reduce the real value of new borrowings.

Financial Summary

Japan’s stock market has rallied to an all-time peak this morning, as the yen falls, following the top position of the LDP was unexpectedly secured by fiscal dove Sanae Takaichi.

Forecasts that Sanae Takaichi is likely to be a PM favoring economic stimulus has sparked a surge of optimistic trading that has pushed Japan’s benchmark index higher by five percent, rising by 2315 points ending at just over 48,000.

However, the currency is heading downward – it dropped about 2 percent relative to the USD at 150.3¥/$.

Sanae Takaichi, who should become Japan’s first female prime minister soon, is a long-time admirer of Thatcher. Yet even though she holds conservative views in social matters, Takaichi follows a contrasting path to fiscal policy, and has advocate a revival of government spending and accommodative central bank measures.

Consequently, analysts anticipate to maintain Japan’s push to spur activity though fiscal spending and cheap credit, likely resulting in increased price pressures and more debt.

Thus the falling currency, as markets predict less monetary tightening in Tokyo compared to earlier expectations.

Japanese long-term bond prices have declined this session, lifting the yield on long-term Japanese bonds near to peak levels, because of predictions of higher borrowing and lasting price increases.

The markets are evaluating the degree to which Takaichi’s plans will resemble the Abenomics strategy implemented by previous leader Abe.

One analyst explained:

Different from previous comments, Takaichi has refrained from talking up the Abenomics program during the party election, but many are aware her core beliefs and her appreciation of Abe’s Three Arrows strategy.

Traders may therefore move to obtain clarity on that position, as well as exactly how influential she might become in directing the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a “live” affair and a 25bp hike seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for last month
• 9.30am BST: UK building sector data for the last month
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit this year