Japanese Currency Falls while Nikkei Rises to All-Time High Following Sanae Takaichi’s Leadership Win; Gold Tops $4,000 Price Point

Market Reactions to the Japanese Ruling Party Vote

Currency strategists at prominent financial institutions have reportedly exited their previous strategies for holding an optimistic view on Japan’s currency following Japan’s ruling party elected Sanae Takaichi as its leader.

In commentary titled “Getting out of the yen,” a chief of FX research commented:

Our strategy was bullish on the yen in our FX Blueprint but have closed this following the party leadership vote. The unexpected win by Takaichi creates renewed unpredictability around Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The expert further cautioned evidence of political control within Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

Bullion values are achieving new all-time peaks, today, in its strongest year since the late 1970s.

The spot price of the precious metal has jumped by over 1% this morning to $3,944 per ounce, approaching the $4,000 threshold.

This indicates gold’s value has increased half again since January 1st, on track for its top annual returns since the late 1970s.

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

Takaichi’s victory in the party vote will only have reinforced apprehensions that government officials will attempt to boost output via increased debt and lower interest rates, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

The Japanese equity market has jumped to unprecedented levels today, as the yen falls, following the leadership of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving Japan’s benchmark index to a 5% gain, adding 2315 points to close at 48,085.

Yet the Japanese yen is heading downward – it has fallen about 2 percent relative to the USD at 150.3¥/$.

The incoming leader, who is expected to become the first woman to lead Japan soon, is a long-time admirer of the former UK leader. But although she is conservative regarding social issues, she follows a contrasting path on budget matters, and promotes a revival of government spending and accommodative central bank measures.

As such, she’s expected to continue Japan’s push to stimulate its economy through public investment and cheap credit, which would lead to rising inflation and increased borrowing.

As a result yen depreciation, as investors anticipate fewer interest rates hikes by Japanese authorities relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, pushing up the yield on long-term Japanese bonds close to peak levels, on expectations of increased debt issuance and sustained inflationary pressures.

The markets are assessing how closely Takaichi’s plans will mirror the “Abenomics” programme advocated by former PM Abe.

A brokerage head noted:

Different from previous comments, Takaichi has refrained from talking up the Abenomics program in this LDP leadership campaign, but most know her underlying stance and her support of the former PM’s Three Arrows approach.

Traders may therefore move to obtain clarity regarding her stance, and how much impact she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is seen as a potential turning point and a rate rise seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: European construction data for last month
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to speak at an investment conference this year