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Financial Market Response to the Japanese Leadership Election

Foreign exchange experts from major investment firms have exited their strategies to hold an optimistic view on Japan’s currency following the country’s governing party elected Takaichi as the new head.

In a report titled “Exiting the yen,” one global head for currency analysis explained:

Our strategy was bullish on the yen as part of our strategy but are now getting out after the weekend’s election result. Takaichi’s unforeseen success reintroduces renewed unpredictability concerning Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue within the Japanese economy, but uncertainty is now going up again on how it will be dealt with.

The expert additionally noted evidence of political control across Japan (in which politicians direct the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000 Level

Gold prices are hitting new all-time peaks, once more, during its best performance since 1979.

The current price of the precious metal has jumped more than 1 percent in recent trading at $3,944 an ounce, as it closes in on the $4000/oz mark.

This shows the gold price has jumped half again since January 1st, on track for its best annual gains since the Iranian Revolution.

Gold has been driven higher this year because of various drivers, among them increasing fears that government debts cannot be maintained.

The new leader’s election win in Japan will only have reinforced apprehensions that politicians may try to stimulate the economy through higher borrowing and reduced rates, and depend on rising prices to diminish the worth of the resulting debt.

Financial Summary

Tokyo’s bourse has rallied to an all-time peak this morning, with the currency dropping, after the chief role of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi will be a pro-stimulus prime minister has triggered a surge of optimistic trading driving the Tokyo stock index up by 5%, rising by over 2300 points to close at 48,085.

However, the currency is very much moving in the other direction – it has fallen nearly two percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan in the coming weeks, has long admired of Thatcher. However, while she holds conservative views regarding social issues, Takaichi takes an un-Thatcherite approach in economic policy, and promotes a revival of government spending and accommodative central bank measures.

Consequently, analysts anticipate to persist with Japan’s push to spur activity through public investment and reduced borrowing costs, potentially causing rising inflation and increased borrowing.

As a result the falling currency, as markets predict reduced rate increases in Tokyo compared to earlier expectations.

Japan’s government bond values have also fallen today, driving higher the yield on long-term Japanese bonds close to all-time highs, because of predictions of higher borrowing and more persistent inflation.

Investors are evaluating the degree to which Sanae Takaichi’s plans will echo the policies of Shinzo Abe pushed by previous leader Shinzo Abe.

One analyst commented:

In contrast to last year, she has not engaged from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her core beliefs and her appreciation of the former PM’s three-pillar philosophy.

Traders may therefore move to gain understanding on that position, as well as exactly how influential she might become in directing monetary policy, given the October BoJ meeting is considered a “live” affair and a rate rise potentially on the table...

Today’s Schedule

• 8.30am BST: European construction data for last month
• 9.30am BST: UK construction PMI for the last month
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to give keynote speech at a financial forum this year