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Investor Sentiment following Japan's Political Shift

FX analysts at major investment firms have exited their previous strategies for holding an optimistic view regarding the Japanese yen following the country’s governing party selected Sanae Takaichi to be its head.

In a report named “Exiting the yen,” a chief of FX research explained:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success creates significant doubt regarding Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The analyst further cautioned evidence of political control in Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000 Threshold

Bullion values are achieving fresh record highs, once more, in its strongest year in over four decades.

The spot price of bullion has jumped by 1% or more this morning at $3,944 an ounce, approaching the $4,000 per ounce level.

This shows the gold price has increased half again since January 1st, on track for its best annual gains since the Iranian Revolution.

Bullion has advanced in recent months by several factors, among them growing worries that national debt levels are unsustainable.

The new leader’s success in the party vote is likely amplifying apprehensions that leaders will attempt to stimulate the economy via increased debt and lower interest rates, and depend on rising prices to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has rallied to a record high this morning, with the currency dropping, following the top position of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving Japan’s benchmark index up by 5%, adding over 2300 points to finish at just over 48,000.

But the yen is heading downward – it dropped almost 2% relative to the USD at 150.3¥/$.

Takaichi, who is expected to become Japan’s first female prime minister soon, has long admired of Thatcher. However, while her social policies are right-leaning on social policy, she adopts a different strategy on budget matters, and promotes a revival of government spending and loose monetary policy.

Therefore, analysts anticipate to maintain Japan’s push to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing increased price pressures and increased borrowing.

Thus the falling currency, as markets predict reduced rate increases from the Bank of Japan than before.

Japan’s government bond values have declined in Monday trading, driving higher the yield on its 30-year debt near to record highs, due to forecasts of increased debt issuance and lasting price increases.

Investors will be calculating to what extent Sanae Takaichi’s plans will mirror the Abenomics strategy pushed by previous leader Shinzo Abe.

A market expert explained:

Different from previous comments, Takaichi has refrained from highlighting the three-arrow strategy in the recent vote, but many are aware her underlying stance and her approval of the former PM’s three-arrow philosophy.

Markets could then push to gain understanding regarding her stance, and how much impact she might become in shaping monetary policy, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase considered likely...

Market Agenda

• 08:30 British Summer Time: European construction data for last month
• 9.30am BST: British construction figures for September
• 6.30pm BST: BOE chief Andrew Bailey to speak at Scotland’s Global Investment Summit this year