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Market Reactions to Japan's Political Shift

Currency strategists at leading investment firms have terminated their recommendations to hold a bullish stance on the yen after Japan’s governing party selected Sanae Takaichi as the new chief.

In commentary titled “Getting out of the yen,” one global head of FX research commented:

We went long JPY as part of our strategy but have closed this following the weekend’s election result. Takaichi’s unforeseen success creates too much uncertainty concerning Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem in Japan, but uncertainty is now going up again 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 Closes In On the $4,000 Mark

The gold price are achieving fresh record highs, once more, in its top-performing period since the late 1970s.

The immediate value of the precious metal has jumped more than 1 percent today to $3,944 per ounce, nearing the $4000/oz mark.

This means gold’s value has jumped half again since January 1st, likely to achieve its top annual returns since the late 1970s.

The metal has risen throughout the year due to multiple reasons, including increasing fears that government debts are unsustainable.

Sanae Takaichi’s victory in the party vote is likely amplifying concerns that leaders could seek to stimulate the economy through higher borrowing and lower interest rates, and rely on inflation to reduce the real value of the resulting debt.

Financial Summary

The Japanese equity market has surged to unprecedented levels in Monday trading, with the currency dropping, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Expectations that Sanae Takaichi will be a pro-stimulus prime minister has ignited a surge of optimistic trading lifting the Nikkei 225 share index higher by five percent, rising by 2315 points to finish at just over 48,000.

Yet the Japanese yen is very much moving the opposite way – it has fallen almost 2% against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, who should become the first woman to lead Japan later this month, is a long-time admirer of the former UK leader. Yet even though her social policies are right-leaning on social policy, the new leader follows a contrasting path in economic policy, and promotes higher state investment and loose monetary policy.

Consequently, markets predict to persist with the national effort to boost economic growth though fiscal spending and cheap credit, potentially causing higher inflation and increased borrowing.

Hence the falling currency, as markets predict fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen in Monday trading, driving higher the return on long-term Japanese bonds close to record highs, on expectations of increased debt issuance and sustained inflationary pressures.

Traders will be calculating how closely the new leader’s plans will mirror the “Abenomics” programme implemented by former PM Shinzo Abe.

One analyst noted:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Abe’s three-arrow strategy.

Markets could then push to obtain clarity regarding her stance, as well as exactly how influential she might become in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

• 8.30am BST: European construction data for last month
• 9:30 AM UK time: UK building sector data for the last month
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit 2025