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Investor Sentiment to the Japanese Ruling Party Vote

Currency strategists from leading investment firms have exited their positions for holding a long position on the yen after the country’s governing party elected Takaichi to be its head.

In commentary titled “Getting out of the yen,” one global head for currency analysis explained:

We held a long yen position as part of our strategy but have now exited after the party leadership vote. Takaichi’s unforeseen success creates significant doubt concerning Japan’s policy priorities and the expected date of BoJ monetary tightening.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The strategist also warned indicators of government influence across Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000/oz Threshold

Bullion values are hitting fresh record highs, again, during its best performance in over four decades.

The spot price of the precious metal has jumped by over 1% in recent trading to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This indicates bullion prices has jumped half again since January 1st, on track for its best annual gains in over 45 years.

The metal has risen in recent months due to multiple reasons, such as increasing fears that national debt levels cannot be maintained.

Takaichi’s victory in the party vote has further strengthened worries that politicians will attempt to secure growth through higher borrowing and reduced rates, and use inflation to erode the value of new borrowings.

Market Overview

Tokyo’s bourse has jumped to an all-time peak in Monday trading, with the currency dropping, after the leadership of the LDP was unexpectedly secured by stimulus supporter Takaichi.

Expectations that Takaichi will be a leader supporting government spending has triggered a surge of optimistic trading driving Japan’s benchmark index to a 5% gain, as it gained more than 2300 points to finish at 48,085.

However, the currency is trending the opposite way – it’s down almost 2% 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 Margaret Thatcher. However, while she is conservative regarding social issues, she follows a contrasting path in economic policy, and supports higher state investment and easy money policies.

Therefore, markets predict to persist with the country’s drive to spur activity through public investment and cheap credit, potentially causing rising inflation and increased borrowing.

Thus the falling currency, as markets predict fewer interest rates hikes in Tokyo relative to previous forecasts.

The nation’s debt securities have declined today, pushing up the yield on long-term Japanese bonds near to all-time highs, due to forecasts of higher borrowing and sustained inflationary pressures.

Investors are evaluating to what extent the new leader’s policies will mirror the “Abenomics” programme implemented by previous leader Shinzo Abe.

One analyst noted:

In contrast to last year, she has not engaged from talking up Abenomics in this LDP leadership campaign, but many are aware her underlying stance and her appreciation of Abe’s three-pillar philosophy.

Markets could then push to obtain clarity on that position, and how much impact she may be in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a key event and a rate rise potentially on the table...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for the last month
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year