Japanese Currency Falls as Nikkei Soars to Record High After Takaichi's Election Victory; Gold Tops $4,000 Level

Investor Sentiment following the Japanese Leadership Election

Currency strategists at leading investment firms have exited their previous strategies for holding an optimistic view on the Japanese yen after Japan’s ruling party selected Takaichi as the new leader.

In commentary called “Exiting the yen,” a global head of FX research commented:

We went long JPY as part of our strategy but have closed this due to the party leadership vote. The unexpected win by Takaichi brings back significant doubt regarding Japan’s policy priorities and the expected date of BoJ monetary tightening.

There is agreement that inflation is a problem for Japan, but doubts are resurfacing about the approach to managing it.

The expert further cautioned evidence of political control across Japan (where state authorities influence the central bank’s actions) pose a potential danger.

Gold Closes In On $4,000 per ounce Level

The gold price are achieving unprecedented levels, today, in its strongest year since the late 1970s.

The spot price of the precious metal has jumped more than 1 percent this morning at $3,944 an ounce, as it closes in on the $4,000 threshold.

This means bullion prices has jumped fifty percent since the start of January, on track for its strongest yearly performance since the late 1970s.

Gold has been driven higher this year because of various drivers, including growing worries that national debt levels cannot be maintained.

The new leader’s success in the Japanese election has further strengthened apprehensions that government officials could seek to boost output through higher borrowing and cheaper credit, and use inflation to reduce the real value of accumulated debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak today, with the currency dropping, following the chief role of the LDP went unexpectedly to by stimulus supporter Takaichi.

Forecasts that Takaichi will become a leader supporting government spending has triggered a surge of optimistic trading lifting Japan’s benchmark index to a 5% gain, adding 2315 points to finish at 48,085.

But the yen is trending in the other direction – it has fallen nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, who should become the nation’s initial woman PM in the coming weeks, is a long-time admirer of Thatcher. But although she is conservative on social policy, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate increased public expenditure and easy money policies.

As such, markets predict to continue Japan’s push to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing higher inflation and increased borrowing.

Hence yen depreciation, as markets predict fewer interest rates hikes in Tokyo relative to previous forecasts.

The nation’s debt securities have also fallen this session, driving higher the return on its 30-year debt near to all-time highs, because of predictions of increased debt issuance and lasting price increases.

The markets are evaluating to what extent Takaichi’s policies will resemble the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst commented:

In contrast to last year, Takaichi has refrained from talking up Abenomics in this LDP leadership campaign, but many are aware her underlying stance and her approval of the former PM’s three-pillar approach.

Traders may therefore move to obtain clarity on her policies, as well as exactly how influential she may be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: European construction data for September
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Central bank head Andrew Bailey to speak at a financial forum this year