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Investor Sentiment following Japan's Political Shift

Currency strategists from leading investment firms have closed their previous positions to hold a long position on the Japanese yen following the country’s governing party elected Sanae Takaichi as the new chief.

In a report named “Getting out of the yen,” a lead strategist for foreign exchange stated:

We went long JPY as part of our strategy but have now exited due to the LDP election outcome. Sanae Takaichi’s surprise victory reintroduces too much uncertainty around Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem for Japan, but doubts are resurfacing about the approach to managing it.

The strategist additionally noted indicators of government influence in Japan (in which politicians direct the BoJ’s moves) represent a downside risk.

Gold Closes In On the $4,000/oz Mark

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

The immediate value of bullion has climbed by over 1% this morning at $3,944 an ounce, approaching the $4000/oz mark.

This means the gold price has jumped by 50% since the start of January, likely to achieve its top annual returns since the Iranian Revolution.

The metal has risen this year due to multiple reasons, among them rising concerns that national debt levels are unsustainable.

The new leader’s success in the party vote will only have reinforced worries that politicians will attempt to boost output by borrowing more and cheaper credit, and depend on rising prices to reduce the real value of accumulated debt.

Trading Update

Japan’s stock market has jumped to a record high in Monday trading, with the currency dropping, following the leadership of the governing party was surprisingly won by fiscal dove Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has triggered a wave of enthusiastic buying driving the Tokyo stock index up by 5%, rising by 2315 points to close at just over 48,000.

Yet the Japanese yen is very much moving the opposite way – it dropped nearly two percent relative to the USD to 150.3 yen per dollar.

Sanae Takaichi, set to be Japan’s first female prime minister in the coming weeks, is a known fan of Thatcher. However, while she holds conservative views in social matters, Takaichi adopts a different strategy in economic policy, and supports a revival of government spending and loose monetary policy.

Therefore, markets predict to continue Japan’s push to stimulate its economy though fiscal spending and lower interest rates, likely resulting in higher inflation and more debt.

As a result yen depreciation, as investors anticipate reduced rate increases in Tokyo than before.

Japanese long-term bond prices are also down today, driving higher the interest rate on its 30-year debt approaching peak levels, because of predictions of more government loans and lasting price increases.

Investors are assessing the degree to which the new leader’s proposals will mirror the Abenomics strategy pushed by former PM Shinzo Abe.

A brokerage head noted:

In contrast to last year, she has not engaged from promoting Abenomics in this LDP leadership campaign, but most know her fundamental position and her appreciation of Shinzo Abe’s three-arrow strategy.

Investors might thus seek to gain understanding regarding her stance, and how much impact she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair and a rate rise considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for September
• 9.30am BST: British construction figures for September
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to deliver address at an investment conference this year