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Financial Market Response to the Japanese Political Shift

Currency strategists from major investment firms have terminated their positions to hold an optimistic view regarding the yen after Japan’s leading political group selected Takaichi as the new head.

In a note named “Exiting the yen,” one lead strategist for foreign exchange commented:

We held a long yen position as part of our strategy but are now getting out after the LDP election outcome. Takaichi’s unforeseen success brings back renewed unpredictability around Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

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

The expert additionally noted indicators of government influence across Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Nears the $4,000 Threshold

Gold prices are hitting fresh record highs, today, in its strongest year since the late 1970s.

The immediate value of bullion has climbed more than 1 percent today at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This indicates the gold price has jumped half again since the start of January, likely to achieve its best annual gains since the Iranian Revolution.

Gold has been driven higher this year by several factors, among them increasing fears that public borrowing are unsustainable.

Sanae Takaichi’s victory in the party vote has further strengthened apprehensions that politicians could seek to boost output through higher borrowing and lower interest rates, and rely on inflation to erode the value of accumulated debt.

Trading Update

Japan’s stock market has rallied to a record high today, while the yen is plunging, after the leadership of the governing party went unexpectedly to by stimulus supporter Sanae Takaichi.

Forecasts that the new leader will become a PM favoring economic stimulus has ignited a wave of enthusiastic buying driving the Tokyo stock index to a 5% gain, rising by 2315 points to close at 48,085.

Yet the Japanese yen is trending the opposite way – it’s down nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, set to be the first woman to lead Japan in the coming weeks, is a long-time admirer of Margaret Thatcher. However, while her social policies are right-leaning in social matters, the new leader follows a contrasting path in economic policy, and has advocate higher state investment and loose monetary policy.

As such, analysts anticipate to continue Japan’s push to spur activity though fiscal spending and cheap credit, potentially causing increased price pressures and increased borrowing.

Thus the weaker yen, as investors anticipate fewer interest rates hikes by Japanese authorities relative to previous forecasts.

The nation’s debt securities have also fallen this session, driving higher the return on thirty-year bonds close to record highs, because of predictions of increased debt issuance and lasting price increases.

The markets are assessing to what extent Sanae Takaichi’s plans will mirror the Abenomics strategy implemented by former PM Abe.

A brokerage head commented:

Different from previous comments, Takaichi has refrained from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her core beliefs and her support of Shinzo Abe’s three-arrow approach.

Traders may therefore move to obtain clarity on her policies, and how much impact she could be in directing monetary policy, given the October BoJ meeting is seen as a “live” affair and a rate rise considered likely...

Economic Calendar

• 8.30am BST: Euro area building activity for September
• 9.30am BST: UK building sector data for September
• 6.30pm BST: Bank of England governor Bailey to speak at Scotland’s Global Investment Summit 2025