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Financial Market Response to Japan's Leadership Election

Currency strategists from leading banks have exited their recommendations to hold an optimistic view on the yen after the country’s leading political group chose Sanae Takaichi to be its head.

In commentary titled “Exiting the yen,” a chief for currency analysis stated:

We held a long yen position within our portfolio but are now getting out following the LDP election outcome. Takaichi’s unforeseen success creates renewed unpredictability around Japan’s policy priorities and the timing of BoJ monetary tightening.

There is agreement that rising prices are an issue for Japan, but doubts are resurfacing regarding how it will be addressed.

The strategist additionally noted that signs of fiscal dominance within Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Approaches the $4,000 Level

Bullion values are achieving new all-time peaks, today, in its top-performing period since 1979.

The spot price of bullion has surged by over 1% this morning reaching $3,944/oz, as it closes in on the $4,000 threshold.

This indicates gold’s value has jumped fifty percent since January 1st, on track for its best annual gains in over 45 years.

Gold has been driven higher in recent months by several factors, including increasing fears that public borrowing are unsustainable.

Takaichi’s success in the Japanese election will only have reinforced worries that politicians could seek to boost output via increased debt and reduced rates, and depend on rising prices to diminish the worth of accumulated debt.

Financial Summary

Tokyo’s bourse has rallied to unprecedented levels today, while the yen is plunging, after the leadership of the country’s ruling party was surprisingly won by stimulus supporter Takaichi.

Predictions that Sanae Takaichi will become a PM favoring economic stimulus has ignited a rush of positive investment lifting the Tokyo stock index up by 5%, as it gained more than 2300 points to finish at 48,085 points.

However, the currency is heading downward – it’s down about 2 percent versus the dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the first woman to lead Japan later this month, is a long-time admirer of Margaret Thatcher. Yet even though her social policies are right-leaning regarding social issues, the new leader adopts a different strategy in economic policy, and has advocate higher state investment and easy money policies.

Therefore, markets predict to continue the national effort to boost economic growth via government outlays and reduced borrowing costs, which would lead to rising inflation and greater borrowing.

As a result the falling currency, with traders expecting fewer interest rates hikes by Japanese authorities than before.

Japanese long-term bond prices have declined today, lifting the yield on thirty-year bonds approaching record highs, on expectations of more government loans and sustained inflationary pressures.

Investors are assessing the degree to which Sanae Takaichi’s policies will echo the “Abenomics” programme implemented by former PM Shinzo Abe.

A brokerage head explained:

In contrast to last year, Takaichi has refrained from talking up the Abenomics program during the party election, but most know her core beliefs and her support of the former PM’s three-arrow philosophy.

Investors might thus seek for more information on her policies, plus the degree of influence she could be in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a key event and a 25bp hike seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to speak at an investment conference 2025