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Investor Sentiment following the Japanese Leadership Election

FX analysts at major investment firms have reportedly terminated their previous positions for holding an optimistic view regarding the Japanese yen following Japan’s ruling party selected Sanae Takaichi to be its head.

In a note named “Leaving yen positions,” a lead strategist for currency analysis commented:

We held a long yen position as part of our strategy but have closed this after the LDP election outcome. The unexpected win by Takaichi brings back significant doubt regarding the nation’s policy focus and the timing of BoJ monetary tightening.

Experts agree that inflationary pressures exist for Japan, but questions are mounting on how it will be dealt with.

The analyst also warned that signs of fiscal dominance within Japan (where state authorities influence the central bank’s actions) represent a downside risk.

Gold Nears $4,000 per ounce Mark

The gold price are achieving fresh record highs, again, during its best performance since the late 1970s.

The immediate value of the precious metal has surged by over 1% in recent trading reaching $3,944/oz, as it closes in on the $4000/oz mark.

This means the gold price has surged by 50% since January 1st, 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 national debt levels cannot be maintained.

Sanae Takaichi’s success in the Japanese election has further strengthened apprehensions that leaders may try to boost output by borrowing more and cheaper credit, and depend on rising prices to erode the value of new borrowings.

Market Overview

Japan’s stock market has jumped to an all-time peak today, with the currency dropping, following the chief role of the governing party went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Takaichi will become a PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Tokyo stock index up by 5%, as it gained 2315 points to close at 48,085 points.

Yet the Japanese yen is very much moving the opposite way – it’s down nearly two percent versus the dollar at 150.3¥/$.

The incoming leader, who should become the nation’s initial woman PM soon, is a long-time admirer of the former UK leader. But although she is conservative on social policy, the new leader adopts a different strategy to fiscal policy, and promotes increased public expenditure and easy money policies.

As such, analysts anticipate to continue Japan’s push to spur activity through public investment and lower interest rates, potentially causing increased price pressures and increased borrowing.

As a result the falling currency, with traders expecting fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities have also fallen today, driving higher the interest rate on thirty-year bonds close to peak levels, due to forecasts of higher borrowing and lasting price increases.

Investors are evaluating how closely Takaichi’s plans will echo the “Abenomics” programme pushed by former PM Abe.

A market expert explained:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but many are aware her core beliefs and her appreciation of the former PM’s three-arrow philosophy.

Investors might thus seek to gain understanding on that position, as well as exactly how influential she might become in forming monetary policy, ahead of the BoJ’s next meeting is considered a “live” affair with a quarter-point increase considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 18:30 BST: Bank of England governor Bailey to give keynote speech at an investment conference this year