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Market Reactions following Japan's Leadership Election

Currency strategists from major investment firms have reportedly terminated their previous positions for holding a long position on the yen following the country’s leading political group selected Takaichi as the new head.

In a note named “Leaving yen positions,” a lead strategist of FX research commented:

We held a long yen position as part of our strategy but have closed this due to the LDP election outcome. The unexpected win by Takaichi creates renewed unpredictability around the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The analyst further cautioned indicators of government influence in Japan (where state authorities influence the BoJ’s moves) are a tail risk.

Gold Nears the $4,000 Level

Gold prices are reaching unprecedented levels, once more, in its top-performing period in over four decades.

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

This indicates the gold price has increased half again since January 1st, likely to achieve its strongest yearly performance in over 45 years.

Gold has been driven higher this year due to multiple reasons, such as increasing fears that national debt levels may be unmanageable.

Takaichi’s victory in Japan has further strengthened worries that government officials may try to stimulate the economy via increased debt and cheaper credit, and use inflation to erode the value of the resulting debt.

Trading Update

Japan’s stock market has jumped to a record high in Monday trading, while the yen is plunging, following the leadership of the governing party was unexpectedly secured by fiscal dove Sanae Takaichi.

Expectations that Takaichi will be a PM favoring economic stimulus has ignited a rush of positive investment that has pushed the Tokyo stock index higher by five percent, rising by 2315 points ending at just over 48,000.

But the yen is trending downward – it has fallen about 2 percent versus the dollar reaching 150.3 against the greenback.

Takaichi, who should become the first woman to lead Japan in the coming weeks, has long admired of the former UK leader. But although her social policies are right-leaning on social policy, the new leader follows a contrasting path on budget matters, and promotes a revival of government spending and loose monetary policy.

As such, analysts anticipate to persist with the country’s drive to spur activity through public investment and lower interest rates, potentially causing increased price pressures and more debt.

As a result yen depreciation, with traders expecting fewer interest rates hikes by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices are also down today, driving higher the interest rate on long-term Japanese bonds near to peak levels, because of predictions of higher borrowing and lasting price increases.

Investors will be calculating to what extent the new leader’s plans will mirror the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

A market expert commented:

In contrast to last year, she has not engaged from talking up the Abenomics program during the party election, but most know her core beliefs and her appreciation of Shinzo Abe’s Three Arrows philosophy.

Traders may therefore move for more information regarding her stance, plus the degree of influence she may be in directing the central bank’s decisions, given the October BoJ meeting is seen as a potential turning point and a 25bp hike potentially on the table...

Market Agenda

• 8:30 AM UK time: European construction data for last month
• 9.30am BST: UK construction PMI for September
• 18:30 BST: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit this year