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Investor Sentiment following Japan's Ruling Party Vote

Foreign exchange experts at leading investment firms have reportedly terminated their strategies to hold an optimistic view regarding the Japanese yen following the country’s ruling party elected Sanae Takaichi as its head.

In a note titled “Getting out of the yen,” one chief for foreign exchange explained:

Our strategy was bullish on the yen within our portfolio but are now getting out due to the LDP election outcome. Sanae Takaichi’s surprise victory brings back renewed unpredictability regarding the nation’s policy focus and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem for Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert also warned that signs of fiscal dominance across Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Nears $4,000 per ounce Mark

Bullion values are achieving unprecedented levels, again, in its top-performing period since the late 1970s.

The current price of gold has jumped by over 1% this morning at $3,944 an ounce, as it closes in on the $4,000 threshold.

This shows gold’s value has surged half again since January 1st, likely to achieve its best annual gains in over 45 years.

The metal has risen this year because of various drivers, such as rising concerns that national debt levels may be unmanageable.

Takaichi’s election win in the Japanese election will only have reinforced concerns that leaders will attempt to secure growth by borrowing more and lower interest rates, and rely on inflation to erode the value of the resulting debt.

Market Overview

Tokyo’s bourse has rallied to an all-time peak in Monday trading, with the currency dropping, following the chief role of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Predictions that the new leader is likely to be a PM favoring economic stimulus has triggered a surge of optimistic trading driving the Nikkei 225 share index higher by five percent, as it gained more than 2300 points ending at just over 48,000.

Yet the Japanese yen is heading downward – it has fallen nearly two percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the nation’s initial woman PM soon, is a known fan of Margaret Thatcher. But although she is conservative regarding social issues, she adopts a different strategy on budget matters, and supports higher state investment and accommodative central bank measures.

Therefore, she’s expected to maintain the country’s drive to stimulate its economy via government outlays and cheap credit, which would lead to higher inflation and more debt.

As a result the falling currency, as investors anticipate fewer interest rates hikes from the Bank of Japan relative to previous forecasts.

The nation’s debt securities have declined today, pushing up the yield on thirty-year bonds near to record highs, because of predictions of higher borrowing and sustained inflationary pressures.

Investors are evaluating how closely the new leader’s proposals will resemble the Abenomics strategy implemented by ex-prime minister Abe.

A brokerage head commented:

Different from previous comments, Takaichi has refrained from highlighting the Abenomics program during the party election, but many are aware her fundamental position and her appreciation of Shinzo Abe’s Three Arrows approach.

Markets could then push to obtain clarity on her policies, plus the degree of influence she may be in directing the central bank’s decisions, ahead of the BoJ’s next meeting is considered a potential turning point with a quarter-point increase potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to speak at an investment conference this year