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Investor Sentiment to Japan's Ruling Party Vote

Currency strategists from prominent banks have exited their strategies to hold a long position on the yen after Japan’s ruling party selected Sanae Takaichi to be its chief.

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

We held a long yen position in our FX Blueprint but have now exited following the weekend’s election result. Takaichi’s unforeseen success reintroduces too much uncertainty around the nation’s policy focus and the timing of interest rate increases by the Bank of Japan.

There is agreement that inflationary pressures exist within the Japanese economy, but questions are mounting regarding how it will be addressed.

The analyst further cautioned indicators of government influence within Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Closes In On the $4,000/oz Level

The gold price are hitting unprecedented levels, again, in its top-performing period since the late 1970s.

The spot price of the precious metal has jumped by 1% or more in recent trading at $3,944 an ounce, nearing the $4,000 per ounce level.

This shows bullion prices has surged by 50% since the start of January, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen throughout the year by several factors, including rising concerns that national debt levels cannot be maintained.

The new leader’s victory in Japan is likely amplifying apprehensions that politicians may try to secure growth via increased debt and cheaper credit, and use inflation to erode the value of accumulated debt.

Trading Update

Tokyo’s bourse has jumped to an all-time peak today, as the yen falls, after the leadership of the country’s ruling party went unexpectedly to by spending advocate Sanae Takaichi.

Forecasts that the new leader is likely to be a leader supporting government spending has sparked a wave of enthusiastic buying lifting Japan’s benchmark index higher by five percent, as it gained 2315 points to finish at 48,085 points.

Yet the Japanese yen is heading the opposite way – it’s down about 2 percent against the US dollar at 150.3¥/$.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, has long admired of Thatcher. But although her social policies are right-leaning regarding social issues, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and accommodative central bank measures.

Therefore, analysts anticipate to persist with the national effort to boost economic growth through public investment and lower interest rates, likely resulting in higher inflation and greater borrowing.

Hence the weaker yen, with traders expecting less monetary tightening in Tokyo than before.

Japanese long-term bond prices have also fallen this session, lifting the interest rate on long-term Japanese bonds near to peak levels, on expectations of increased debt issuance and sustained inflationary pressures.

Investors are evaluating the degree to which the new leader’s policies will mirror the policies of Shinzo Abe advocated by previous leader Abe.

A brokerage head explained:

In contrast to last year, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but experts understand her fundamental position and her support of the former PM’s three-pillar approach.

Traders may therefore move to gain understanding regarding her stance, as well as exactly how influential she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is viewed as a “live” affair and a rate rise considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for last month
• 9:30 AM UK time: UK building sector data for September
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to speak at an investment conference this year