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Investor Sentiment following Japan's Ruling Party Vote

Currency strategists at leading financial institutions have reportedly terminated their strategies to hold an optimistic view on Japan’s currency following the country’s leading political group chose Sanae Takaichi to be its leader.

In a report called “Exiting the yen,” a chief for currency analysis commented:

Our strategy was bullish on the yen within our portfolio but have now exited after the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability concerning Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem in Japan, but doubts are resurfacing regarding how it will be addressed.

The expert also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Mark

The gold price are hitting unprecedented levels, once more, during its best performance since 1979.

The spot price of the precious metal has climbed more than 1 percent this morning to $3,944 per ounce, nearing the $4000/oz mark.

This means gold’s value has surged fifty percent since January 1st, likely to achieve its best annual gains in over 45 years.

Bullion has advanced throughout the year because of various drivers, including growing worries that public borrowing cannot be maintained.

Takaichi’s victory in Japan has further strengthened apprehensions that leaders will attempt to boost output by borrowing more and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Trading Update

Tokyo’s bourse has rallied to a record high in Monday trading, with the currency dropping, after the leadership of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that the new leader is likely to be a leader supporting government spending has triggered a wave of enthusiastic buying that has pushed the Nikkei 225 share index up by 5%, adding 2315 points to close at 48,085 points.

But the yen is very much moving downward – it dropped almost 2% relative to the USD reaching 150.3 against the greenback.

The incoming leader, set to be Japan’s first female prime minister in the coming weeks, has long admired of the former UK leader. But although she holds conservative views regarding social issues, the new leader follows a contrasting path on budget matters, and supports higher state investment and accommodative central bank measures.

Therefore, markets predict to continue the country’s drive to spur activity via government outlays and lower interest rates, potentially causing increased price pressures and increased borrowing.

Thus yen depreciation, as markets predict less monetary tightening in Tokyo than before.

Japan’s government bond values have also fallen in Monday trading, driving higher the interest rate on long-term Japanese bonds close to all-time highs, because of predictions of more government loans and lasting price increases.

Investors are evaluating how closely the new leader’s policies will echo the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from talking up Abenomics in the recent vote, but many are aware her fundamental position and her approval of the former PM’s Three Arrows approach.

Investors might thus seek for more information on her policies, as well as exactly how influential she might become in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a “live” affair with a quarter-point increase potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 9:30 AM UK time: British construction figures for September
• 6.30pm BST: Central bank head Bailey to give keynote speech at Scotland’s Global Investment Summit this year