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Financial Market Response to the Japanese Political Shift

Foreign exchange experts from prominent investment firms have reportedly exited their previous strategies for holding a long position regarding Japan’s currency following the country’s ruling party selected Sanae Takaichi as its head.

In commentary called “Exiting the yen,” one chief of FX research stated:

We held a long yen position as part of our strategy but have now exited following the party leadership vote. Takaichi’s unforeseen success reintroduces renewed unpredictability around Japan’s policy priorities and the expected date of BoJ monetary tightening.

Experts agree that rising prices are an issue in Japan, but questions are mounting on how it will be dealt with.

The strategist also warned evidence of political control in Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Nears the $4,000/oz Threshold

Bullion values are hitting unprecedented levels, again, during its best performance since 1979.

The spot price of gold has surged by over 1% in recent trading reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows bullion prices has surged fifty percent from the beginning of the year, likely to achieve its strongest yearly performance since the Iranian Revolution.

Gold has been driven higher throughout the year due to multiple reasons, including increasing fears that government debts cannot be maintained.

Sanae Takaichi’s election win in Japan will only have reinforced apprehensions that government officials may try to secure growth by borrowing more and lower interest rates, and use inflation to diminish the worth of accumulated debt.

Financial Summary

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

Expectations that Takaichi is likely to be a leader supporting government spending has ignited a surge of optimistic trading lifting the Tokyo stock index up by 5%, as it gained more than 2300 points to finish at 48,085 points.

But the yen is very much moving in the other direction – it’s down about 2 percent relative to the USD to 150.3 yen per dollar.

Takaichi, who should become the nation’s initial woman PM soon, is a known fan of the former UK leader. But although her social policies are right-leaning regarding social issues, Takaichi follows a contrasting path in economic policy, and promotes increased public expenditure and loose monetary policy.

As such, markets predict to continue the country’s drive to stimulate its economy via government outlays and cheap credit, likely resulting in increased price pressures and more debt.

Hence the falling currency, as investors anticipate fewer interest rates hikes by Japanese authorities relative to previous forecasts.

Japan’s government bond values have declined today, lifting the return on long-term Japanese bonds near to peak levels, because of predictions of increased debt issuance and sustained inflationary pressures.

Traders are assessing to what extent Sanae Takaichi’s proposals will mirror the Abenomics strategy pushed by former PM Abe.

One analyst commented:

Different from previous comments, she has not engaged from promoting Abenomics in this LDP leadership campaign, but many are aware her core beliefs and her support of the former PM’s three-pillar philosophy.

Markets could then push to obtain clarity on her policies, and how much impact she may be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike considered likely...

Economic Calendar

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 9:30 AM UK time: UK construction PMI for the last month
• 6.30pm BST: BOE chief Andrew Bailey to give keynote speech at a financial forum this year