🔗 Share this article

Financial Market Response following the Japanese Political Shift

Currency strategists at major investment firms have terminated their positions to hold a long position regarding the yen following Japan’s ruling party elected Sanae Takaichi as the new chief.

In a note called “Getting out of the yen,” a global head for foreign exchange explained:

We went long JPY as part of our strategy but have now exited following the party leadership vote. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability regarding Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue within the Japanese economy, but questions are mounting about the approach to managing it.

The expert additionally noted evidence of political control within Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Closes In On $4,000 per ounce Level

The gold price are achieving new all-time peaks, today, during its best performance since 1979.

The immediate value of gold has jumped more than 1 percent this morning at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This shows the gold price has jumped half again since the start of January, likely to achieve its strongest yearly performance in over 45 years.

The metal has risen throughout the year because of various drivers, such as growing worries that government debts are unsustainable.

Takaichi’s success in the party vote is likely amplifying worries that government officials may try to stimulate the economy via increased debt and lower interest rates, and depend on rising prices to diminish the worth of accumulated debt.

Financial Summary

The Japanese equity market has surged to an all-time peak in Monday trading, as the yen falls, after the leadership of the country’s ruling party was surprisingly won by spending advocate Sanae Takaichi.

Forecasts that Takaichi will become a leader supporting government spending has ignited a rush of positive investment lifting Japan’s benchmark index up by 5%, as it gained over 2300 points to finish at 48,085 points.

However, the currency is trending in the other direction – it’s down about 2 percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who should become Japan’s first female prime minister soon, is a long-time admirer of the former UK leader. Yet even though she holds conservative views in social matters, Takaichi takes an un-Thatcherite approach to fiscal policy, and supports higher state investment and accommodative central bank measures.

As such, she’s expected to persist with the country’s drive to stimulate its economy though fiscal spending and cheap credit, which would lead to rising inflation and increased borrowing.

Thus the weaker yen, with traders expecting reduced rate increases from the Bank of Japan compared to earlier expectations.

Japan’s government bond values are also down this session, lifting the return on thirty-year bonds close to peak levels, due to forecasts of more government loans and sustained inflationary pressures.

Investors are assessing the degree to which Takaichi’s policies will resemble the Abenomics strategy implemented by previous leader Shinzo Abe.

A market expert noted:

Unlike in late 2024, Takaichi has refrained from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Shinzo Abe’s three-pillar strategy.

Markets could then push to gain understanding on that position, as well as exactly how influential she might become in directing the central bank’s decisions, with the Bank of Japan’s October session is considered a key event and a 25bp hike potentially on the table...

Economic Calendar

• 8.30am BST: Euro area building activity for September
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Bank of England governor Bailey to deliver address at a financial forum this year