Japanese Yen Tumbles while Nikkei Rises to Peak Following Takaichi's Election Victory; Gold Nears $4,000 Price Point

Financial Market Response following Japan's Leadership Election

Foreign exchange experts at prominent financial institutions have reportedly closed their recommendations for holding a bullish stance on the yen following Japan’s governing party chose Sanae Takaichi as its chief.

In a report named “Getting out of the yen,” a chief of FX research commented:

We held a long yen position as part of our strategy but have now exited due to the party leadership vote. Takaichi’s unforeseen success creates significant doubt regarding Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The strategist also warned evidence of political control within Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Nears the $4,000/oz Mark

Bullion values are achieving new all-time peaks, again, in its top-performing period since the late 1970s.

The immediate value of bullion has jumped more than 1 percent in recent trading at $3,944 an ounce, approaching the $4,000 threshold.

This indicates gold’s value has surged half again since the start of January, on track for its best annual gains in over 45 years.

The metal has risen throughout the year due to multiple reasons, such as increasing fears that national debt levels cannot be maintained.

The new leader’s victory in Japan is likely amplifying worries that government officials could seek to stimulate the economy via increased debt and lower interest rates, and rely on inflation to diminish the worth of the resulting debt.

Financial Summary

Japan’s stock market has surged to unprecedented levels in Monday trading, as the yen falls, following the leadership of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Forecasts that Sanae Takaichi will be a pro-stimulus prime minister has sparked a wave of enthusiastic buying lifting Japan’s benchmark index higher by five percent, rising by over 2300 points to close at 48,085.

But the yen is trending in the other direction – it’s down almost 2% against the US dollar at 150.3¥/$.

Sanae Takaichi, who should become the nation’s initial woman PM soon, has long admired of the former UK leader. Yet even though she holds conservative views on social policy, Takaichi takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and accommodative central bank measures.

Therefore, analysts anticipate to maintain the national effort to spur activity via government outlays and reduced borrowing costs, which would lead to rising inflation and more debt.

Hence the falling currency, as markets predict fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities have declined today, lifting the yield on long-term Japanese bonds approaching all-time highs, on expectations of higher borrowing and sustained inflationary pressures.

Investors will be calculating the degree to which Takaichi’s plans will resemble the Abenomics strategy pushed by former PM Shinzo Abe.

A market expert commented:

Different from previous comments, the leader has avoided from promoting the Abenomics program in the recent vote, but most know her underlying stance and her support of Shinzo Abe’s Three Arrows approach.

Investors might thus seek to gain understanding on her policies, and how much impact she may be in shaping the central bank’s decisions, given the October BoJ meeting is considered a key event and a rate rise potentially on the table...

Market Agenda

• 08:30 British Summer Time: European construction data for the previous month
• 09:30 BST: UK construction PMI for September
• 18:30 BST: Central bank head Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year