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Investor Sentiment to the Japanese Leadership Election

FX analysts at major banks have reportedly exited their positions for holding a bullish stance on the Japanese yen following Japan’s leading political group chose Sanae Takaichi as its head.

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

We held a long yen position within our portfolio but are now getting out after the weekend’s election result. Takaichi’s unforeseen success brings back renewed unpredictability around Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

Experts agree that rising prices are an issue for Japan, but questions are mounting on how it will be dealt with.

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

Gold Closes In On the $4,000 Threshold

The gold price are reaching unprecedented levels, today, in its strongest year in over four decades.

The current price of gold has jumped more than 1 percent today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This indicates the gold price has increased by 50% from the beginning of the year, likely to achieve its top annual returns in over 45 years.

Gold has been driven higher this year due to multiple reasons, among them rising concerns that government debts are unsustainable.

Sanae Takaichi’s success in the party vote has further strengthened concerns that leaders could seek to stimulate the economy via increased debt and lower interest rates, and depend on rising prices to erode the value of the resulting debt.

Market Overview

Japan’s stock market has jumped to unprecedented levels in Monday trading, while the yen is plunging, following the top position of the LDP was surprisingly won by fiscal dove Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has triggered a surge of optimistic trading lifting Japan’s benchmark index higher by five percent, adding more than 2300 points to finish at 48,085 points.

However, the currency is heading downward – it dropped nearly two percent relative to the USD at 150.3¥/$.

Takaichi, set to be the first woman to lead Japan soon, is a known fan of the former UK leader. But although her social policies are right-leaning in social matters, Takaichi takes an un-Thatcherite approach to fiscal policy, and promotes a revival of government spending and easy money policies.

As such, she’s expected to maintain Japan’s push to boost economic growth though fiscal spending and reduced borrowing costs, which would lead to rising inflation and greater borrowing.

As a result the falling currency, as investors anticipate fewer interest rates hikes from the Bank of Japan than before.

Japan’s government bond values are also down today, driving higher the interest rate on long-term Japanese bonds near to peak levels, because of predictions of increased debt issuance and sustained inflationary pressures.

Investors will be calculating to what extent the new leader’s plans will mirror the Abenomics strategy implemented by ex-prime minister Shinzo Abe.

One analyst noted:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy during the party election, but most know her underlying stance and her approval of the former PM’s three-arrow approach.

Markets could then push to gain understanding regarding her stance, as well as exactly how influential she may be in directing monetary policy, ahead of the BoJ’s next meeting is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: European construction data for last month
• 9:30 AM UK time: UK building sector data for the last month
• 6.30pm BST: Central bank head Andrew Bailey to give keynote speech at an investment conference this year