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Investor Sentiment following the Japanese Political Shift

Foreign exchange experts from prominent banks have exited their previous strategies for holding a bullish stance on the yen after Japan’s governing party elected Sanae Takaichi as its leader.

In a report titled “Exiting the yen,” a lead strategist for currency analysis stated:

We held a long yen position within our portfolio but have now exited due to the party leadership vote. Sanae Takaichi’s surprise victory creates too much uncertainty around Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem for Japan, but uncertainty is now going up again about the approach to managing it.

The strategist also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000/oz Threshold

Gold prices are hitting new all-time peaks, again, in its strongest year since the late 1970s.

The spot price of the precious metal has jumped by 1% or more today to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This means bullion prices has increased by 50% since the start of January, heading for its best annual gains since the Iranian Revolution.

Gold has been driven higher this year by several factors, such as rising concerns that public borrowing are unsustainable.

Takaichi’s election win in Japan is likely amplifying worries that politicians may try to boost output through higher borrowing and lower interest rates, and use inflation to reduce the real value of new borrowings.

Market Overview

Tokyo’s bourse has rallied to a record high in Monday trading, while the yen is plunging, following the chief role of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that Takaichi will become a leader supporting government spending has triggered a wave of enthusiastic buying that has pushed the Tokyo stock index up by 5%, adding 2315 points to finish at just over 48,000.

But the yen is heading in the other direction – it has fallen about 2 percent relative to the USD at 150.3¥/$.

Takaichi, 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 on social policy, the new leader follows a contrasting path in economic policy, and promotes a revival of government spending and easy money policies.

Therefore, analysts anticipate to continue the national effort to spur activity though fiscal spending and cheap credit, which would lead to rising inflation and more debt.

Hence the falling currency, as investors anticipate reduced rate increases in Tokyo relative to previous forecasts.

Japanese long-term bond prices are also down in Monday trading, pushing up the yield on long-term Japanese bonds approaching record highs, due to forecasts of more government loans and lasting price increases.

Investors are evaluating the degree to which Takaichi’s proposals will resemble the “Abenomics” programme advocated by ex-prime minister Shinzo Abe.

One analyst explained:

In contrast to last year, Takaichi has refrained from promoting Abenomics during the party election, but many are aware her fundamental position and her support of Shinzo Abe’s Three Arrows approach.

Investors might thus seek to obtain clarity regarding her stance, and how much impact she might become in forming monetary policy, ahead of the BoJ’s next meeting is considered a “live” affair and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: Central bank head Andrew Bailey to deliver address at a financial forum this year