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Market Reactions to the Japanese Political Shift

FX analysts from leading financial institutions have closed their previous strategies to hold a long position on the yen after the country’s ruling party elected Takaichi as the new leader.

In a note named “Leaving yen positions,” a chief of FX research explained:

We held a long yen position within our portfolio but have closed this due to the party leadership vote. The unexpected win by Takaichi brings back renewed unpredictability regarding 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 for Japan, but questions are mounting on how it will be dealt with.

The expert additionally noted indicators of government influence in Japan (where the government controls the BoJ’s moves) represent a downside risk.

Gold Approaches the $4,000 Level

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

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

This means bullion prices has increased half again since January 1st, on track for its strongest yearly performance in over 45 years.

Bullion has advanced this year by several factors, among them growing worries that public borrowing are unsustainable.

The new leader’s success in the party vote will only have reinforced apprehensions that leaders could seek to secure growth via increased debt and reduced rates, and use inflation to diminish the worth of the resulting debt.

Market Overview

Tokyo’s bourse has jumped to a record high in Monday trading, as the yen falls, after the leadership of the country’s ruling party was unexpectedly secured by fiscal dove Sanae Takaichi.

Forecasts that the new leader is likely to be a leader supporting government spending has ignited a surge of optimistic trading that has pushed Japan’s benchmark index up by 5%, rising by over 2300 points ending at 48,085 points.

However, the currency is trending downward – it dropped about 2 percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be the first woman to lead Japan soon, is a known fan of Margaret Thatcher. Yet even though her social policies are right-leaning on social policy, Takaichi adopts a different strategy to fiscal policy, and promotes increased public expenditure and accommodative central bank measures.

As such, analysts anticipate to maintain Japan’s push to spur activity though fiscal spending and lower interest rates, which would lead to increased price pressures and greater borrowing.

Thus yen depreciation, as investors anticipate fewer interest rates hikes by Japanese authorities than before.

Japan’s government bond values have also fallen in Monday trading, lifting the yield on its 30-year debt close to record highs, due to forecasts of higher borrowing and lasting price increases.

The markets are assessing the degree to which Takaichi’s policies will mirror the Abenomics strategy implemented by former PM Shinzo Abe.

A brokerage head explained:

Different from previous comments, she has not engaged from promoting the Abenomics program in the recent vote, but experts understand her fundamental position and her support of Abe’s three-pillar philosophy.

Investors might thus seek to obtain clarity on that position, as well as exactly how influential she may be in shaping monetary policy, with the Bank of Japan’s October session is seen as a key event and a 25bp hike seen as a real possibility...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for September
• 9.30am BST: UK construction PMI for September
• 6:30 PM UK time: BOE chief Bailey to deliver address at Scotland’s Global Investment Summit this year