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Market Reactions to Japan's Political Shift

Currency strategists from prominent banks have reportedly exited their recommendations for holding a bullish stance regarding Japan’s currency after the country’s governing party selected Sanae Takaichi to be its chief.

In commentary titled “Leaving yen positions,” a chief for foreign exchange commented:

We held a long yen position as part of our strategy but have closed this due to the weekend’s election result. The unexpected win by Takaichi brings back too much uncertainty around Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflationary pressures exist in Japan, but questions are mounting about the approach to managing it.

The strategist also warned evidence of political control across Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Closes In On $4,000 per ounce Level

Bullion values are achieving unprecedented levels, today, in its strongest year since 1979.

The spot price of bullion has jumped by 1% or more in recent trading reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This indicates the gold price has jumped half again from the beginning of the year, on track for its strongest yearly performance in over 45 years.

Gold has been driven higher throughout the year because of various drivers, including rising concerns that national debt levels are unsustainable.

Sanae Takaichi’s success in the party vote will only have reinforced concerns that politicians will attempt to stimulate the economy by borrowing more and reduced rates, and use inflation to reduce the real value of the resulting debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak today, as the yen falls, following the leadership of the country’s ruling party went unexpectedly to by spending advocate Takaichi.

Predictions that the new leader is likely to be a PM favoring economic stimulus has sparked a surge of optimistic trading driving Japan’s benchmark index up by 5%, as it gained more than 2300 points to close at just over 48,000.

But the yen is heading downward – it’s down about 2 percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be Japan’s first female prime minister soon, has long admired of Thatcher. But although she is conservative regarding social issues, the new leader adopts a different strategy to fiscal policy, and has advocate increased public expenditure and accommodative central bank measures.

Consequently, analysts anticipate to continue the national effort to boost economic growth through public investment and lower interest rates, potentially causing higher inflation and greater borrowing.

Hence yen depreciation, as markets predict less monetary tightening by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices are also down today, pushing up the interest rate on its 30-year debt near to peak levels, because of predictions of more government loans and sustained inflationary pressures.

Investors will be calculating the degree to which Sanae Takaichi’s policies will echo the policies of Shinzo Abe pushed by former PM Shinzo Abe.

A market expert noted:

In contrast to last year, the leader has avoided from highlighting the three-arrow strategy in this LDP leadership campaign, but most know her fundamental position and her support of Shinzo Abe’s three-arrow philosophy.

Markets could then push for more information on her policies, plus the degree of influence she could be in directing the central bank’s decisions, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase considered likely...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for the previous month
• 09:30 BST: British construction figures for the last month
• 6:30 PM UK time: Bank of England governor Andrew Bailey to deliver address at an investment conference 2025