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Investor Sentiment to Japan's Ruling Party Vote

Currency strategists at leading financial institutions have exited their strategies to hold an optimistic view regarding Japan’s currency after the country’s governing party selected Sanae Takaichi as the new head.

In a report called “Leaving yen positions,” a global head for currency analysis explained:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out after the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability concerning the nation’s policy focus as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflationary pressures exist within the Japanese economy, but questions are mounting about the approach to managing it.

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

Gold Nears the $4,000 Mark

Bullion values are hitting fresh record highs, again, in its strongest year since the late 1970s.

The current price of bullion has climbed more than 1 percent today at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This shows gold’s value has surged by 50% since the start of January, heading for its best annual gains since the late 1970s.

Bullion has advanced throughout the year due to multiple reasons, such as increasing fears that national debt levels cannot be maintained.

The new leader’s election win in Japan has further strengthened worries that government officials will attempt to boost output through higher borrowing and lower interest rates, and use inflation to diminish the worth of the resulting debt.

Market Overview

Tokyo’s bourse has surged to a record high this morning, as the yen falls, after the chief role of the LDP was surprisingly won by stimulus supporter Sanae Takaichi.

Expectations that the new leader will be a PM favoring economic stimulus has triggered a rush of positive investment that has pushed Japan’s benchmark index up by 5%, adding 2315 points ending at 48,085 points.

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

Takaichi, set to be Japan’s first female prime minister soon, is a long-time admirer of Thatcher. But although she holds conservative views regarding social issues, Takaichi follows a contrasting path to fiscal policy, and supports higher state investment and accommodative central bank measures.

As such, markets predict to maintain the country’s drive to boost economic growth though fiscal spending and reduced borrowing costs, potentially causing increased price pressures and greater borrowing.

Thus yen depreciation, with traders expecting fewer interest rates hikes by Japanese authorities compared to earlier expectations.

Japan’s government bond values are also down today, pushing up the return on thirty-year bonds close to all-time highs, because of predictions of higher borrowing and more persistent inflation.

Traders are evaluating how closely Sanae Takaichi’s proposals will mirror the “Abenomics” programme implemented by former PM Abe.

One analyst explained:

Different from previous comments, Takaichi has refrained from promoting the three-arrow strategy in the recent vote, but most know her underlying stance and her approval of Shinzo Abe’s three-pillar approach.

Markets could then push to obtain clarity on that position, and how much impact she may be in forming monetary policy, ahead of the BoJ’s next meeting is viewed as a “live” affair with a quarter-point increase potentially on the table...

Market Agenda

• 8.30am BST: Euro area building activity for the previous month
• 09:30 BST: UK building sector data for the last month
• 18:30 BST: BOE chief Bailey to deliver address at Scotland’s Global Investment Summit this year