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Market Reactions following Japan's Political Shift

FX analysts from major financial institutions have terminated their strategies to hold a long position regarding Japan’s currency after the country’s governing party elected Takaichi to be its chief.

In a note titled “Getting out of the yen,” one chief for currency analysis commented:

We held a long yen position in our FX Blueprint but are now getting out after the LDP election outcome. The unexpected win by Takaichi brings back too much uncertainty concerning the nation’s policy focus and the expected date of BoJ monetary tightening.

Analysts concur that inflationary pressures exist in Japan, but doubts are resurfacing regarding how it will be addressed.

The expert further cautioned that signs of fiscal dominance in Japan (where state authorities influence the central bank’s actions) are a tail risk.

Gold Approaches $4,000 per ounce Level

Gold prices are hitting fresh record highs, again, in its top-performing period since the late 1970s.

The spot price of the precious metal has surged by 1% or more today reaching $3,944/oz, approaching the $4,000 per ounce level.

This means bullion prices has jumped fifty percent since January 1st, likely to achieve its strongest yearly performance since the Iranian Revolution.

Gold has been driven higher throughout the year due to multiple reasons, among them rising concerns that national debt levels cannot be maintained.

Sanae Takaichi’s election win in the party vote is likely amplifying worries that leaders may try to stimulate the economy via increased debt and reduced rates, and rely on inflation to reduce the real value of new borrowings.

Trading Update

Tokyo’s bourse has surged to an all-time peak today, while the yen is plunging, following the leadership of the LDP went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Takaichi is likely to be a leader supporting government spending has sparked a surge of optimistic trading driving the Nikkei 225 share index up by 5%, adding over 2300 points to finish at just over 48,000.

Yet the Japanese yen is trending downward – it’s down about 2 percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, who is expected to become the nation’s initial woman PM soon, has long admired of Margaret Thatcher. However, while she holds conservative views in social matters, the new leader takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and easy money policies.

Therefore, she’s expected to maintain the national effort to stimulate its economy via government outlays and reduced borrowing costs, likely resulting in rising inflation and increased borrowing.

As a result the falling currency, as investors anticipate less monetary tightening from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices are also down today, lifting the yield on its 30-year debt close to all-time highs, because of predictions of more government loans and more persistent inflation.

Traders are evaluating the degree to which Takaichi’s plans will echo the Abenomics strategy pushed by ex-prime minister Abe.

One analyst noted:

In contrast to last year, she has not engaged from highlighting the Abenomics program in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Shinzo Abe’s three-arrow philosophy.

Traders may therefore move to gain understanding on her policies, and how much impact she might become in shaping the central bank’s decisions, given the October BoJ meeting is seen as a “live” affair and a 25bp hike seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 9.30am BST: UK building sector data for September
• 18:30 BST: Bank of England governor Bailey to speak at Scotland’s Global Investment Summit 2025