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Investor Sentiment following the Japanese Ruling Party Vote

FX analysts from prominent financial institutions have exited their previous positions for holding an optimistic view on Japan’s currency following Japan’s ruling party chose Sanae Takaichi as its leader.

In commentary titled “Getting out of the yen,” a global head for foreign exchange explained:

We held a long yen position in our FX Blueprint but have closed this after the party leadership vote. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability concerning Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The expert additionally noted that signs of fiscal dominance in Japan (where state authorities influence the central bank’s actions) are a tail risk.

Gold Closes In On $4,000 per ounce Threshold

Gold prices are hitting fresh record highs, today, during its best performance since the late 1970s.

The current price of bullion has climbed more than 1 percent this morning to $3,944 per ounce, approaching the $4000/oz mark.

This indicates the gold price has surged half again from the beginning of the year, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen this year because of various drivers, such as increasing fears that government debts cannot be maintained.

Takaichi’s victory in Japan is likely amplifying apprehensions that politicians may try to secure growth through higher borrowing and lower interest rates, and rely on inflation to erode the value of the resulting debt.

Financial Summary

Tokyo’s bourse has surged to an all-time peak in Monday trading, as the yen falls, following the top position of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that Takaichi is likely to be a PM favoring economic stimulus has ignited a surge of optimistic trading lifting the Nikkei 225 share index up by 5%, rising by over 2300 points ending at just over 48,000.

But the yen is very much moving downward – it has fallen almost 2% relative to the USD at 150.3¥/$.

Sanae Takaichi, who should become Japan’s first female prime minister in the coming weeks, is a known fan of Thatcher. But although she holds conservative views regarding social issues, the new leader adopts a different strategy on budget matters, and has advocate a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to persist with Japan’s push to spur activity through public investment and lower interest rates, likely resulting in increased price pressures and more debt.

Thus the weaker yen, with traders expecting reduced rate increases by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices have also fallen today, lifting the interest rate on its 30-year debt approaching all-time highs, due to forecasts of more government loans and lasting price increases.

Investors are assessing the degree to which Sanae Takaichi’s proposals will mirror the Abenomics strategy pushed by ex-prime minister Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but many are aware her underlying stance and her support of Shinzo Abe’s Three Arrows approach.

Traders may therefore move to obtain clarity on her policies, plus the degree of influence she may be in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a potential turning point with a quarter-point increase considered likely...

Market Agenda

• 8.30am BST: Eurozone construction PMI for last month
• 09:30 BST: British construction figures for the last month
• 18:30 BST: BOE chief Andrew Bailey to deliver address at a financial forum this year