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Market Reactions to Japan's Political Shift

Foreign exchange experts from leading investment firms have reportedly exited their recommendations for holding an optimistic view on the Japanese yen following the country’s leading political group selected Sanae Takaichi to be its head.

In a report named “Exiting the yen,” one global head of FX research stated:

We held a long yen position in our FX Blueprint but have now exited following the party leadership vote. The unexpected win by Takaichi reintroduces renewed unpredictability regarding Japanese economic goals and the timing of BoJ monetary tightening.

Analysts concur that inflationary pressures exist within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The expert additionally noted indicators of government influence across Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Nears the $4,000 Threshold

Bullion values are reaching fresh record highs, again, during its best performance since 1979.

The spot price of bullion has jumped more than 1 percent today reaching $3,944/oz, as it closes in on the $4000/oz mark.

This means bullion prices has increased half again from the beginning of the year, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen throughout the year due to multiple reasons, such as rising concerns that government debts are unsustainable.

Sanae Takaichi’s election win in the party vote has further strengthened concerns that politicians could seek to stimulate the economy via increased debt and reduced rates, and depend on rising prices to diminish the worth of accumulated debt.

Trading Update

Japan’s stock market has surged to an all-time peak today, with the currency dropping, after the chief role of the governing party went unexpectedly to by fiscal dove Takaichi.

Forecasts that Takaichi will be a PM favoring economic stimulus has ignited a rush of positive investment lifting Japan’s benchmark index higher by five percent, as it gained over 2300 points to close at 48,085 points.

But the yen is very much moving the opposite way – it’s down about 2 percent versus the dollar at 150.3¥/$.

Takaichi, set to be Japan’s first female prime minister soon, has long admired of Thatcher. But although she is conservative on social policy, the new leader follows a contrasting path in economic policy, and supports higher state investment and loose monetary policy.

As such, she’s expected to persist with the national effort to boost economic growth through public investment and lower interest rates, potentially causing rising inflation and more debt.

Hence the falling currency, with traders expecting less monetary tightening by Japanese authorities compared to earlier expectations.

Japanese long-term bond prices have declined today, pushing up the return on long-term Japanese bonds approaching all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Investors will be calculating how closely Sanae Takaichi’s plans will mirror the “Abenomics” programme advocated by previous leader Abe.

A brokerage head explained:

In contrast to last year, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but experts understand her core beliefs and her support of Abe’s three-pillar philosophy.

Traders may therefore move to gain understanding regarding her stance, as well as exactly how influential she might become in forming monetary policy, ahead of the BoJ’s next meeting is viewed as a “live” affair and a 25bp hike considered likely...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 09:30 BST: UK construction PMI for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to deliver address at an investment conference 2025