Yen Plummets as Nikkei Jumps to Peak After Takaichi's Election Victory; Gold Nears $4,000 Level

Investor Sentiment following Japan's Ruling Party Vote

Currency strategists from major banks have exited their previous strategies to hold an optimistic view on Japan’s currency after the country’s leading political group chose Takaichi as its head.

In a report titled “Exiting the yen,” a global head for currency analysis commented:

We held a long yen position as part of our strategy but have closed this due to the weekend’s election result. Sanae Takaichi’s surprise victory brings back significant doubt regarding the nation’s policy focus and the expected date of BoJ monetary tightening.

There is agreement that rising prices are an issue in Japan, but questions are mounting about the approach to managing it.

The strategist further cautioned indicators of government influence in Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Level

Bullion values are hitting unprecedented levels, today, in its top-performing period since 1979.

The spot price of the precious metal has climbed by 1% or more today at $3,944 an ounce, nearing the $4,000 per ounce level.

This shows gold’s value has increased by 50% since the start of January, on track for its top annual returns since the late 1970s.

Bullion has advanced this year because of various drivers, such as rising concerns that government debts may be unmanageable.

Sanae Takaichi’s victory in the party vote will only have reinforced worries that leaders could seek to boost output via increased debt and cheaper credit, and depend on rising prices to diminish the worth of the resulting debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak today, while the yen is plunging, following the top position of the governing party was unexpectedly secured by stimulus supporter Takaichi.

Expectations that Sanae Takaichi will become a PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Nikkei 225 share index higher by five percent, as it gained over 2300 points ending at 48,085 points.

But the yen is very much moving the opposite way – it dropped almost 2% against the US dollar to 150.3 yen per dollar.

Takaichi, set to be the nation’s initial woman PM later this month, is a known fan of Thatcher. However, while she holds conservative views regarding social issues, the new leader follows a contrasting path on budget matters, and promotes higher state investment and easy money policies.

As such, she’s expected to persist with the country’s drive to spur activity though fiscal spending and lower interest rates, which would lead to increased price pressures and increased borrowing.

As a result yen depreciation, as investors anticipate less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices are also down this session, pushing up the yield on its 30-year debt near to record highs, because of predictions of more government loans and more persistent inflation.

Traders are evaluating how closely the new leader’s plans will echo the Abenomics strategy pushed by previous leader Shinzo Abe.

A brokerage head explained:

In contrast to last year, the leader has avoided from promoting the three-arrow strategy in the recent vote, but experts understand her core beliefs and her approval of Shinzo Abe’s three-arrow strategy.

Markets could then push to gain understanding regarding her stance, plus the degree of influence she might become in shaping the BoJ’s policy thinking, given the October BoJ meeting is seen as a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: Euro area building activity for last month
• 9.30am BST: British construction figures for the last month
• 6:30 PM UK time: Central bank head Andrew Bailey to speak at a financial forum this year