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Investor Sentiment following the Japanese Ruling Party Vote

FX analysts at leading banks have reportedly exited their strategies to hold a long position regarding the yen following the country’s governing party elected Sanae Takaichi as its chief.

In a note called “Exiting the yen,” a lead strategist for currency analysis stated:

Our strategy was bullish on the yen within our portfolio but have now exited following the LDP election outcome. The unexpected win by Takaichi creates renewed unpredictability regarding Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

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

The strategist additionally noted evidence of political control in Japan (where the government controls monetary policy decisions) pose a potential danger.

Gold Nears the $4,000/oz Threshold

The gold price are achieving fresh record highs, once more, in its strongest year since the late 1970s.

The current price of bullion has jumped by over 1% in recent trading to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This indicates bullion prices has surged half again from the beginning of the year, likely to achieve its strongest yearly performance in over 45 years.

The metal has risen throughout the year because of various drivers, including rising concerns that government debts may be unmanageable.

Sanae Takaichi’s election win in Japan is likely amplifying concerns that leaders will attempt to stimulate the economy via increased debt and lower interest rates, and rely on inflation to erode the value of the resulting debt.

Market Overview

Japan’s stock market has surged to a record high this morning, while the yen is plunging, after the leadership of the governing party was surprisingly won by stimulus supporter Takaichi.

Expectations that Takaichi will be a pro-stimulus prime minister has sparked a surge of optimistic trading lifting Japan’s benchmark index up by 5%, as it gained 2315 points to close at just over 48,000.

But the yen is heading the opposite way – it’s down nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, is a known fan of Thatcher. Yet even though she holds conservative views in social matters, the new leader takes an un-Thatcherite approach on budget matters, and promotes higher state investment and loose monetary policy.

As such, analysts anticipate to maintain the national effort to stimulate its economy through public investment and cheap credit, likely resulting in rising inflation and greater borrowing.

As a result the falling currency, with traders expecting less monetary tightening from the Bank of Japan than before.

Japanese long-term bond prices are also down in Monday trading, pushing up the interest rate on thirty-year bonds close to peak levels, on expectations of more government loans and sustained inflationary pressures.

Traders are evaluating to what extent Takaichi’s policies will resemble the “Abenomics” programme pushed by former PM Abe.

A market expert noted:

Different from previous comments, the leader has avoided from promoting Abenomics during the party election, but many are aware her core beliefs and her approval of Shinzo Abe’s three-pillar philosophy.

Markets could then push for more information on that position, and how much impact she could be in directing monetary policy, given the October BoJ meeting is viewed as a key event and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: UK building sector data for September
• 18:30 BST: Central bank head Bailey to deliver address at an investment conference this year