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Financial Market Response following the Japanese Political Shift

Currency strategists at leading banks have closed their positions for holding an optimistic view regarding Japan’s currency following the country’s ruling party chose Sanae Takaichi to be its leader.

In commentary called “Exiting the yen,” a chief of FX research stated:

We went long JPY as part of our strategy but are now getting out following the LDP election outcome. The unexpected win by Takaichi brings back too much uncertainty regarding Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflationary pressures exist in Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst also warned that signs of fiscal dominance in Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Approaches $4,000 per ounce Level

The gold price are achieving new all-time peaks, again, during its best performance in over four decades.

The immediate value of gold has jumped more than 1 percent in recent trading at $3,944 an ounce, approaching the $4,000 per ounce level.

This indicates the gold price has surged by 50% since January 1st, heading for its best annual gains in over 45 years.

Gold has been driven higher this year by several factors, among them increasing fears that public borrowing are unsustainable.

Takaichi’s success in the party vote has further strengthened concerns that government officials could seek 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 rallied to an all-time peak today, with the currency dropping, following the top position of the LDP went unexpectedly to by spending advocate Takaichi.

Predictions that Sanae Takaichi will become a pro-stimulus prime minister has triggered a rush of positive investment driving the Nikkei 225 share index higher by five percent, rising by 2315 points to finish at just over 48,000.

But the yen is trending in the other direction – it dropped about 2 percent relative to the USD to 150.3 yen per dollar.

Takaichi, set to be Japan’s first female prime minister in the coming weeks, is a long-time admirer of Thatcher. However, while she holds conservative views 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 Japan’s push to boost economic growth though fiscal spending and lower interest rates, likely resulting in higher inflation and greater borrowing.

Thus yen depreciation, as investors anticipate fewer interest rates hikes in Tokyo than before.

Japan’s government bond values have declined in Monday trading, pushing up the return on its 30-year debt close to peak levels, because of predictions of more government loans and sustained inflationary pressures.

Traders are evaluating how closely Takaichi’s proposals will echo the Abenomics strategy pushed by former PM Shinzo Abe.

A market expert explained:

Different from previous comments, she has not engaged from highlighting Abenomics during the party election, but many are aware her fundamental position and her approval of Shinzo Abe’s three-arrow strategy.

Traders may therefore move to obtain clarity on her policies, and how much impact she may be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a “live” affair with a quarter-point increase potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for the previous month
• 9.30am BST: British construction figures for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at an investment conference 2025