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Financial Market Response following the Japanese Leadership Election

Currency strategists at prominent financial institutions have closed their previous strategies to hold an optimistic view regarding the Japanese yen after the country’s ruling party chose Takaichi to be its leader.

In a report called “Exiting the yen,” one lead strategist for foreign exchange stated:

We held a long yen position as part of our strategy but are now getting out following the weekend’s election result. Takaichi’s unforeseen success reintroduces too much uncertainty around the nation’s policy focus and the expected date of the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue in Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert also warned evidence of political control across Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Mark

The gold price are achieving new all-time peaks, today, in its top-performing period in over four decades.

The current price of the precious metal has climbed by 1% or more this morning reaching $3,944/oz, nearing the $4,000 threshold.

This means gold’s value has jumped by 50% from the beginning of the year, on track for its best annual gains in over 45 years.

The metal has risen this year due to multiple reasons, including growing worries that public borrowing are unsustainable.

Sanae Takaichi’s election win in Japan will only have reinforced worries that leaders could seek to secure growth through higher borrowing and reduced rates, and depend on rising prices to diminish the worth of the resulting debt.

Financial Summary

Japan’s stock market has jumped to a record high in Monday trading, as the yen falls, after the top position of the LDP was surprisingly won by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi will be a leader supporting government spending has ignited a wave of enthusiastic buying lifting the Nikkei 225 share index up by 5%, rising by 2315 points ending at just over 48,000.

However, the currency is very much moving in the other direction – it dropped nearly two percent versus the dollar at 150.3¥/$.

Sanae Takaichi, set to be the first woman to lead Japan later this month, is a known fan of the former UK leader. Yet even though she holds conservative views in social matters, the new leader follows a contrasting path on budget matters, and promotes increased public expenditure and easy money policies.

Therefore, analysts anticipate to maintain the country’s drive to stimulate its economy through public investment and cheap credit, likely resulting in higher inflation and increased borrowing.

Thus the weaker yen, with traders expecting fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities are also down this session, pushing up the interest rate on thirty-year bonds near to record highs, because of predictions of more government loans and more persistent inflation.

The markets are evaluating the degree to which Takaichi’s policies will resemble the “Abenomics” programme pushed by previous leader Shinzo Abe.

One analyst noted:

Unlike in late 2024, the leader has avoided from promoting the three-arrow strategy during the party election, but many are aware her underlying stance and her appreciation of Shinzo Abe’s Three Arrows strategy.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she may be in shaping monetary policy, given the October BoJ meeting is seen as a key event and a 25bp hike potentially on the table...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Bank of England governor Andrew Bailey to deliver address at a financial forum this year