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Financial Market Response to the Japanese Leadership Election

FX analysts from major investment firms have reportedly terminated their positions for holding a long position on the yen following the country’s ruling party selected Sanae Takaichi as its chief.

In a report called “Leaving yen positions,” one global head for foreign exchange explained:

Our strategy was bullish on the yen within our portfolio but have now exited following the party leadership vote. Sanae Takaichi’s surprise victory brings back renewed unpredictability regarding Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist for Japan, but questions are mounting regarding how it will be addressed.

The strategist additionally noted indicators of government influence across Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Approaches $4,000 per ounce Level

Gold prices are achieving unprecedented levels, again, in its strongest year since 1979.

The spot price of the precious metal has jumped more than 1 percent this morning reaching $3,944/oz, approaching the $4,000 per ounce level.

This shows the gold price has surged half again since the start of January, likely to achieve its top annual returns since the Iranian Revolution.

Gold has been driven higher throughout the year due to multiple reasons, including growing worries that public borrowing may be unmanageable.

Takaichi’s election win in the party vote will only have reinforced apprehensions that politicians will attempt to boost output by borrowing more and reduced rates, and use inflation to erode the value of new borrowings.

Market Overview

The Japanese equity market has surged to unprecedented levels this morning, while the yen is plunging, after the chief role of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Expectations that the new leader will become a pro-stimulus prime minister has triggered a surge of optimistic trading that has pushed the Nikkei 225 share index to a 5% gain, rising by more than 2300 points ending at just over 48,000.

However, the currency is very much moving downward – it has fallen about 2 percent relative to the USD reaching 150.3 against the greenback.

The incoming leader, who should become the nation’s initial woman PM later this month, is a long-time admirer of Margaret Thatcher. But although she holds conservative views on social policy, the new leader takes an un-Thatcherite approach on budget matters, and supports increased public expenditure and accommodative central bank measures.

As such, she’s expected to persist with the country’s drive to boost economic growth through public investment and reduced borrowing costs, likely resulting in higher inflation and greater borrowing.

As a result yen depreciation, as investors anticipate less monetary tightening by Japanese authorities compared to earlier expectations.

The nation’s debt securities are also down this session, lifting the yield on thirty-year bonds close to record highs, because of predictions of increased debt issuance and lasting price increases.

The markets are evaluating how closely the new leader’s policies will echo the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

A brokerage head explained:

In contrast to last year, Takaichi has refrained from talking up Abenomics during the party election, but many are aware her fundamental position and her approval of Abe’s Three Arrows philosophy.

Investors might thus seek for more information regarding her stance, and how much impact she might become in forming the central bank’s decisions, given the October BoJ meeting is considered a potential turning point and a 25bp hike seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: European construction data for last month
• 9:30 AM UK time: British construction figures for September
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to deliver address at an investment conference 2025