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Investor Sentiment to the Japanese Political Shift

Currency strategists at prominent investment firms have reportedly terminated their previous recommendations for holding an optimistic view on Japan’s currency after Japan’s governing party chose Takaichi as its chief.

In a note titled “Leaving yen positions,” one global head for foreign exchange commented:

Our strategy was bullish on the yen in our FX Blueprint but have now exited due to the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability regarding the nation’s policy focus as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem within the Japanese economy, but uncertainty is now going up again on how it will be dealt with.

The analyst further cautioned indicators of government influence across Japan (where the government controls the central bank’s actions) pose a potential danger.

Gold Approaches the $4,000/oz Level

Gold prices are hitting fresh record highs, today, in its top-performing period since the late 1970s.

The current price of the precious metal has climbed by 1% or more today reaching $3,944/oz, as it closes in on the $4,000 threshold.

This means bullion prices has jumped by 50% from the beginning of the year, heading for its strongest yearly performance since the Iranian Revolution.

The metal has risen throughout the year by several factors, including increasing fears that government debts cannot be maintained.

Sanae Takaichi’s victory in the party vote is likely amplifying concerns that politicians could seek to boost output by borrowing more and reduced rates, and depend on rising prices to erode the value of accumulated debt.

Market Overview

Tokyo’s bourse has jumped to a record high today, while the yen is plunging, after the leadership of the country’s ruling party was surprisingly won by spending advocate Sanae Takaichi.

Expectations that Takaichi will be a leader supporting government spending has sparked a rush of positive investment driving the Tokyo stock index up by 5%, as it gained over 2300 points to close at 48,085.

Yet the Japanese yen is very much moving the opposite way – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, set to be the first woman to lead Japan later this month, is a known fan of Margaret Thatcher. But although she is conservative in social matters, Takaichi follows a contrasting path in economic policy, and has advocate higher state investment and accommodative central bank measures.

As such, markets predict to continue the country’s drive to spur activity through public investment and lower interest rates, which would lead to increased price pressures and greater borrowing.

Hence the falling currency, as investors anticipate reduced rate increases by Japanese authorities than before.

Japan’s government bond values are also down in Monday trading, pushing up the return on thirty-year bonds near to all-time highs, because of predictions of increased debt issuance and sustained inflationary pressures.

Investors are assessing how closely Sanae Takaichi’s policies will echo the Abenomics strategy implemented by previous leader Shinzo Abe.

A brokerage head noted:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy during the party election, but experts understand her fundamental position and her appreciation of the former PM’s Three Arrows approach.

Investors might thus seek for more information on her policies, as well as exactly how influential she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase considered likely...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at an investment conference this year