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Financial Market Response to the Japanese Political Shift

FX analysts from prominent banks have reportedly exited their previous positions for holding a bullish stance on the yen following Japan’s ruling party elected Sanae Takaichi as its leader.

In a report titled “Leaving yen positions,” one chief for foreign exchange explained:

We went long JPY within our portfolio but have now exited due to the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty regarding Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist in Japan, but questions are mounting on how it will be dealt with.

The analyst additionally noted evidence of political control within Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000/oz Level

Bullion values are hitting new all-time peaks, again, during its best performance in over four decades.

The immediate value of gold has climbed by 1% or more today reaching $3,944/oz, approaching the $4,000 per ounce level.

This means gold’s value has increased by 50% from the beginning of the year, likely to achieve its strongest yearly performance since the Iranian Revolution.

The metal has risen this year because of various drivers, including increasing fears that public borrowing cannot be maintained.

The new leader’s election win in the Japanese election has further strengthened concerns that politicians will attempt to secure growth via increased debt and reduced rates, and rely on inflation to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has surged to unprecedented levels today, while the yen is plunging, following the chief role of the country’s ruling party was surprisingly won by fiscal dove Takaichi.

Expectations that the new leader will become a leader supporting government spending has triggered a rush of positive investment that has pushed Japan’s benchmark index up by 5%, as it gained over 2300 points to finish at 48,085.

However, the currency is trending the opposite way – it has fallen almost 2% versus the dollar to 150.3 yen per dollar.

Takaichi, who is expected to become the first woman to lead Japan soon, is a long-time admirer of the former UK leader. But although her social policies are right-leaning on social policy, the new leader adopts a different strategy in economic policy, and promotes higher state investment and accommodative central bank measures.

Consequently, she’s expected to maintain the national effort to stimulate its economy via government outlays and lower interest rates, potentially causing higher inflation and increased borrowing.

Hence yen depreciation, as investors anticipate less monetary tightening in Tokyo than before.

The nation’s debt securities are also down today, driving higher the interest rate on its 30-year debt near to all-time highs, on expectations of higher borrowing and more persistent inflation.

Investors are assessing how closely Sanae Takaichi’s proposals will mirror the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

One analyst explained:

Unlike in late 2024, Takaichi has refrained from promoting Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her appreciation of the former PM’s three-arrow strategy.

Investors might thus seek to gain understanding on that position, and how much impact she might become in forming the central bank’s decisions, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase considered likely...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for the previous month
• 09:30 BST: British construction figures for the last month
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year