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Financial Market Response following the Japanese Ruling Party Vote

FX analysts from leading financial institutions have closed their previous strategies for holding an optimistic view regarding Japan’s currency after the country’s governing party selected Sanae Takaichi as its leader.

In commentary named “Exiting the yen,” a lead strategist of FX research stated:

Our strategy was bullish on the yen as part of our strategy but have now exited following the weekend’s election result. The unexpected win by Takaichi brings back renewed unpredictability concerning Japanese economic goals as well as the schedule for BoJ monetary tightening.

There is agreement that inflationary pressures exist for Japan, but uncertainty is now going up again on how it will be dealt with.

The strategist additionally noted evidence of political control in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Mark

The gold price are achieving new all-time peaks, once more, in its top-performing period since 1979.

The spot price of gold has surged by over 1% this morning reaching $3,944/oz, approaching the $4000/oz mark.

This means the gold price has jumped fifty percent since the start of January, likely to achieve its strongest yearly performance since the late 1970s.

Bullion has advanced this year by several factors, such as rising concerns that public borrowing are unsustainable.

Sanae Takaichi’s election win in the party vote is likely amplifying worries that politicians may try to stimulate the economy through higher borrowing and lower interest rates, and rely on inflation to reduce the real value of accumulated debt.

Financial Summary

The Japanese equity market has rallied to unprecedented levels this morning, as the yen falls, following the leadership of the LDP was surprisingly won by fiscal dove Takaichi.

Forecasts that the new leader will become a pro-stimulus prime minister has triggered a surge of optimistic trading that has pushed the Tokyo stock index to a 5% gain, rising by 2315 points to close at 48,085 points.

But the yen is trending the opposite way – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

The incoming leader, who should become the first woman to lead Japan later this month, has long admired of Margaret Thatcher. However, while she is conservative regarding social issues, she adopts a different strategy to fiscal policy, and supports higher state investment and accommodative central bank measures.

As such, analysts anticipate to persist with Japan’s push to boost economic growth through public investment and reduced borrowing costs, which would lead to higher inflation and increased borrowing.

Thus yen depreciation, as investors anticipate less monetary tightening by Japanese authorities compared to earlier expectations.

The nation’s debt securities are also down this session, driving higher the yield on long-term Japanese bonds near to peak levels, on expectations of higher borrowing and sustained inflationary pressures.

Traders are evaluating the degree to which Takaichi’s plans will mirror the “Abenomics” programme implemented by previous leader Shinzo Abe.

A market expert noted:

Different from previous comments, Takaichi has refrained from highlighting Abenomics in the recent vote, but many are aware her core beliefs and her approval of the former PM’s Three Arrows strategy.

Markets could then push to gain understanding on her policies, as well as exactly how influential she might become in directing monetary policy, given the October BoJ meeting is seen as a “live” affair and a rate rise considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for last month
• 09:30 BST: British construction figures for September
• 6.30pm BST: Central bank head Andrew Bailey to give keynote speech at a financial forum this year