Japanese Yen Tumbles while Nikkei Soars to All-Time High After Takaichi's Leadership Win; Gold Tops $4,000 Mark

Financial Market Response following Japan's Political Shift

Foreign exchange experts at leading financial institutions have reportedly closed their previous positions for holding an optimistic view regarding the yen after the country’s leading political group elected Takaichi as the new head.

In commentary called “Getting out of the yen,” one lead strategist of FX research commented:

We held a long yen position as part of our strategy but have now exited after the weekend’s election result. The unexpected win by Takaichi reintroduces renewed unpredictability concerning Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

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

The strategist also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Closes In On the $4,000/oz Level

The gold price are reaching unprecedented levels, again, during its best performance since the late 1970s.

The current price of the precious metal has climbed by 1% or more in recent trading at $3,944 an ounce, as it closes in on the $4,000 threshold.

This means bullion prices has increased fifty percent from the beginning of the year, on track for its top annual returns since the Iranian Revolution.

Gold has been driven higher this year because of various drivers, such as growing worries that government debts may be unmanageable.

The new leader’s election win in the Japanese election is likely amplifying worries that leaders will attempt to stimulate the economy through higher borrowing and cheaper credit, and depend on rising prices to diminish the worth of accumulated debt.

Financial Summary

Tokyo’s bourse has rallied to a record high today, with the currency dropping, following the chief role of the LDP was unexpectedly secured by spending advocate Takaichi.

Expectations that Takaichi will become a leader supporting government spending has triggered a rush of positive investment lifting the Nikkei 225 share index to a 5% gain, rising by over 2300 points to finish at just over 48,000.

But the yen is heading the opposite way – it has fallen about 2 percent versus the dollar at 150.3¥/$.

The incoming leader, who should become Japan’s first female prime minister later this month, is a long-time admirer of Thatcher. But although she holds conservative views on social policy, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate a revival of government spending and accommodative central bank measures.

Therefore, she’s expected to persist with the national effort to spur activity though fiscal spending and lower interest rates, likely resulting in increased price pressures and greater borrowing.

Thus yen depreciation, with traders expecting reduced rate increases by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices are also down in Monday trading, driving higher the interest rate on long-term Japanese bonds near to all-time highs, on expectations of higher borrowing and more persistent inflation.

Traders are assessing how closely Sanae Takaichi’s policies will echo the “Abenomics” programme advocated by ex-prime minister Abe.

A brokerage head commented:

In contrast to last year, Takaichi has refrained from highlighting the three-arrow strategy during the party election, but experts understand her fundamental position and her support of Shinzo Abe’s three-pillar approach.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she might become in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is seen as a potential turning point and a 25bp hike potentially on the table...

Economic Calendar

• 8.30am BST: Euro area building activity for September
• 9.30am BST: British construction figures for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to give keynote speech at an investment conference this year