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Investor Sentiment to the Japanese Political Shift

Currency strategists from prominent financial institutions have terminated their positions for holding a long position on the yen following Japan’s ruling party chose Sanae Takaichi as its leader.

In a note named “Getting out of the yen,” one global head for foreign exchange explained:

We held a long yen position within our portfolio but have closed this following the weekend’s election result. Sanae Takaichi’s surprise victory creates significant doubt regarding the nation’s policy focus as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist in Japan, but uncertainty is now going up again regarding how it will be addressed.

The analyst additionally noted evidence of political control within Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Closes In On the $4,000 Level

Bullion values are hitting fresh record highs, once more, in its top-performing period since 1979.

The immediate value of bullion has climbed by over 1% today at $3,944 an ounce, as it closes in on the $4,000 threshold.

This shows bullion prices has jumped by 50% from the beginning of the year, likely to achieve its top annual returns in over 45 years.

Bullion has advanced this year because of various drivers, including rising concerns that public borrowing are unsustainable.

Takaichi’s success in Japan has further strengthened worries that politicians could seek to stimulate the economy through higher borrowing and reduced rates, and depend on rising prices to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has jumped to a record high in Monday trading, as the yen falls, after the leadership of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Forecasts that the new leader will be a pro-stimulus prime minister has ignited a rush of positive investment driving the Tokyo stock index up by 5%, adding over 2300 points to finish at just over 48,000.

But the yen is trending in the other direction – it dropped about 2 percent against the US dollar reaching 150.3 against the greenback.

The incoming leader, who is expected to become the nation’s initial woman PM later this month, is a known fan of Thatcher. But although she holds conservative views regarding social issues, she adopts a different strategy in economic policy, and has advocate increased public expenditure and accommodative central bank measures.

Therefore, analysts anticipate to maintain the national effort to boost economic growth through public investment and cheap credit, which would lead to increased price pressures and greater borrowing.

Thus yen depreciation, with traders expecting less monetary tightening from the Bank of Japan compared to earlier expectations.

Japan’s government bond values are also down in Monday trading, lifting the yield on thirty-year bonds close to all-time highs, because of predictions of more government loans and more persistent inflation.

Traders will be calculating the degree to which Takaichi’s policies will resemble the “Abenomics” programme implemented by ex-prime minister Shinzo Abe.

A market expert noted:

In contrast to last year, Takaichi has refrained from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Shinzo Abe’s three-arrow strategy.

Markets could then push to gain understanding on that position, as well as exactly how influential she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is considered a key event with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for September
• 9.30am BST: British construction figures for September
• 6.30pm BST: Central bank head Bailey to speak at a financial forum this year