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Financial Market Response to Japan's Political Shift

Currency strategists at leading financial institutions have reportedly terminated their previous positions to hold an optimistic view regarding Japan’s currency following the country’s leading political group chose Sanae Takaichi to be its chief.

In a note named “Getting out of the yen,” one chief for currency analysis stated:

We went long JPY within our portfolio but have now exited following the LDP election outcome. The unexpected win by Takaichi brings back significant doubt around Japanese economic goals as well as the schedule for BoJ monetary tightening.

Analysts concur that inflationary pressures exist for Japan, but uncertainty is now going up again regarding how it will be addressed.

The strategist also warned evidence of political control in Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Nears the $4,000/oz Mark

Gold prices are hitting unprecedented levels, once more, in its strongest year in over four decades.

The immediate value of the precious metal has climbed by over 1% in recent trading at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This indicates the gold price has increased half again from the beginning of the year, on track for its best annual gains since the late 1970s.

Bullion has advanced in recent months by several factors, including increasing fears that government debts cannot be maintained.

The new leader’s success in the party vote has further strengthened apprehensions that leaders will attempt to stimulate the economy via increased debt and reduced rates, and depend on rising prices to reduce the real value of accumulated debt.

Financial Summary

The Japanese equity market has rallied to an all-time peak this morning, while the yen is plunging, following the leadership of the LDP was unexpectedly secured by fiscal dove Sanae Takaichi.

Predictions that Sanae Takaichi will become a PM favoring economic stimulus has ignited a wave of enthusiastic buying driving Japan’s benchmark index to a 5% gain, rising by 2315 points ending at 48,085.

But the yen is heading downward – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

Takaichi, who is expected to become Japan’s first female prime minister soon, is a long-time admirer of the former UK leader. But although she is conservative on social policy, she follows a contrasting path on budget matters, and supports higher state investment and loose monetary policy.

Therefore, analysts anticipate to continue the country’s drive to boost economic growth via government outlays and lower interest rates, which would lead to rising inflation and greater borrowing.

Thus the falling currency, with traders expecting fewer interest rates hikes by Japanese authorities relative to previous forecasts.

The nation’s debt securities are also down this session, pushing up the return on thirty-year bonds approaching peak levels, due to forecasts of higher borrowing and sustained inflationary pressures.

Investors will be calculating how closely Sanae Takaichi’s policies will echo the policies of Shinzo Abe advocated by former PM Shinzo Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from promoting Abenomics in the recent vote, but experts understand her underlying stance and her support of Abe’s three-arrow strategy.

Markets could then push to gain understanding on her policies, plus the degree of influence she might become in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a “live” affair and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: European construction data for September
• 9.30am BST: UK building sector data for September
• 6.30pm BST: Bank of England governor Bailey to give keynote speech at Scotland’s Global Investment Summit 2025