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Investor Sentiment to the Japanese Leadership Election

Currency strategists at leading banks have reportedly closed their previous recommendations for holding an optimistic view on Japan’s currency following Japan’s governing party elected Sanae Takaichi as the new head.

In a report named “Exiting the yen,” a chief for currency analysis commented:

We went long JPY as part of our strategy but have closed this after the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty around Japan’s policy priorities and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The strategist also warned that signs of fiscal dominance within Japan (in which politicians direct the BoJ’s moves) represent a downside risk.

Gold Nears $4,000 per ounce Level

Gold prices are achieving new all-time peaks, again, in its strongest year since 1979.

The current price of bullion has jumped by over 1% this morning to $3,944 per ounce, nearing the $4,000 per ounce level.

This means gold’s value has surged by 50% from the beginning of the year, on track for its best annual gains in over 45 years.

Bullion has advanced throughout the year because of various drivers, among them growing worries that public borrowing are unsustainable.

Takaichi’s election win in the Japanese election has further strengthened apprehensions that politicians will attempt to boost output by borrowing more and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Market Overview

Tokyo’s bourse has rallied to unprecedented levels in Monday trading, as the yen falls, following the chief role of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Forecasts that Sanae Takaichi will be a PM favoring economic stimulus has sparked a surge of optimistic trading that has pushed Japan’s benchmark index higher by five percent, adding more than 2300 points to finish at 48,085 points.

Yet the Japanese yen is heading the opposite way – it’s down about 2 percent versus the dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the nation’s initial woman PM soon, is a known fan of Thatcher. But although she is conservative regarding social issues, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and loose monetary policy.

Therefore, she’s expected to maintain the country’s drive to boost economic growth through public investment and lower interest rates, potentially causing higher inflation and increased borrowing.

As a result yen depreciation, as investors anticipate reduced rate increases in Tokyo than before.

Japan’s government bond values have also fallen today, driving higher the interest rate on long-term Japanese bonds approaching all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Investors will be calculating to what extent Takaichi’s proposals will echo the policies of Shinzo Abe advocated by previous leader Shinzo Abe.

One analyst commented:

In contrast to last year, the leader has avoided from promoting Abenomics in the recent vote, but many are aware her core beliefs and her support of Shinzo Abe’s Three Arrows strategy.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she may be in shaping the BoJ’s policy thinking, given the October BoJ meeting is considered a potential turning point and a 25bp hike potentially on the table...

Today’s Schedule

• 8.30am BST: Eurozone construction PMI for last month
• 9:30 AM UK time: British construction figures for September
• 18:30 BST: Central bank head Andrew Bailey to give keynote speech at an investment conference this year