Tokyo Rises, Yen Falls as Takaichi Triumphs on Turbulent Asian Day

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Tokyo Stocks Reach Record High Amid Optimism

Tokyo stocks experienced a significant surge, rising over four percent to reach a record high on Monday. This movement was driven by speculation that the new leader of Japan's ruling party would initiate a new era of loose monetary policy aimed at revitalizing the country's economy. The market's positive sentiment was further fueled by news of Sanae Takaichi's victory, who is expected to become prime minister this month. Takaichi has previously supported aggressive monetary easing and increased government spending, which contributed to renewed optimism among traders.

Despite the positive developments in Tokyo, other Asian markets showed mixed results following last week's gains. Investors were closely monitoring lawmakers' efforts to resolve the US government shutdown. However, expectations of another Federal Reserve interest rate cut this month continued to support risk assets. Both the S&P 500 and Dow reached peaks, alongside increases in bitcoin and gold prices.

Takaichi, after her recent victory, pledged to implement measures to address inflation and boost Japan's economy, particularly focusing on rural areas and primary industries such as farming and fisheries. According to Taro Kimura from Bloomberg Economics, Takaichi appears more inclined than others to stimulate the economy. However, he cautioned that with inflation rising and long-term bond yields climbing, she must balance her policies to avoid exacerbating the cost-of-living crisis and destabilizing the rate market.

The Nikkei 225's surge coincided with a sharp decline in the yen, which fell more than one percent against the dollar, reaching nearly 150 per dollar. The yen also hit an all-time low against the euro, standing at 175.69 to the single currency. Masamichi Adachi, UBS Securities chief economist for Japan, noted that the market might see a return of the "Takaichi trade," characterized by higher equity prices (except banks), yen depreciation, and increased super-long bond yields. Yields on 30-year Japanese bonds also rose sharply, reflecting concerns about the potential growth of the country's already substantial debt under Takaichi's leadership.

While there were gains in Singapore and Manila, Hong Kong, Sydney, and Seoul saw declines. Shanghai remained closed for a holiday. Despite these fluctuations, sentiment remained positive, especially after bitcoin reached a new peak of $125,689 on Sunday. Gold prices surged past $3,924 and approached $4,000 an ounce on Monday, benefiting from the US government shutdown and anticipated rate cuts.

London's FTSE ended the previous week at a record high, and US futures were all up. The partial closure of the US government dragged into the week after senators rejected a funding fix proposed by President Donald Trump's Republicans for the fourth time. Key public services have been affected since Wednesday due to ongoing congressional deadlock on maintaining government operations.

This situation impacted the release of key jobs data used by the Fed to guide its monetary policy, which was not released when it was due on Friday. However, analysts believe that recent reports indicating a slowing labor market may be sufficient for the Fed to cut rates at its next meeting at the end of the month. Other inflation readings are also expected before then.

Economists at Bank of America suggested that the shutdown is likely to end soon, allowing for the release of the September jobs report before the October policy meeting. Even if the initial September payrolls data is strong, dovish members of the committee may emphasize the recent trend of downward revisions to justify further rate cuts. Given the recent dovish pivot by Fed chief Jerome Powell, this argument is expected to prevail.

Oil prices rose more than one percent, continuing Friday's gains, after OPEC+ agreed to increase supplies by 137,000 barrels per day, although this was less than initially anticipated.

Key Figures Around 0230 GMT

  • Tokyo - Nikkei 225: UP 4.5 percent at 47,835.36
  • Hong Kong - Hang Seng Index: DOWN 0.5 percent at 26,995.12
  • Shanghai - Composite: Closed for a holiday
  • Dollar/yen: UP at 149.84 yen from 147.45 yen
  • Pound/dollar: DOWN at $1.3455 from $1.3482
  • Euro/pound: UP at 87.17 pence from 87.09 pence
  • Euro/dollar: DOWN at $1.1728 from $1.1742 on Friday
  • West Texas Intermediate: UP 1.5 percent at $61.78 per barrel
  • Brent North Sea Crude: UP 1.4 percent at $64.45 per barrel
  • New York - Dow: UP 0.5 percent at 46,758.28 points
  • London - FTSE 100: UP 0.7 percent at 9,491.25

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