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Financial Market Response following the Japanese Leadership Election

Currency strategists from prominent investment firms have reportedly closed their previous recommendations to hold an optimistic view on the Japanese yen after the country’s ruling party selected Sanae Takaichi as the new leader.

In commentary named “Exiting the yen,” a lead strategist for foreign exchange stated:

We went long JPY as part of our strategy but have closed this after the party leadership vote. Sanae Takaichi’s surprise victory reintroduces too much uncertainty around Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem for Japan, but doubts are resurfacing regarding how it will be addressed.

The strategist further cautioned indicators of government influence across Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Approaches $4,000 per ounce Threshold

Gold prices are reaching unprecedented levels, once more, in its strongest year since 1979.

The immediate value of gold has surged by 1% or more in recent trading to $3,944 per ounce, nearing the $4000/oz mark.

This indicates bullion prices has increased by 50% from the beginning of the year, heading for its best annual gains since the late 1970s.

The metal has risen in recent months due to multiple reasons, including increasing fears that government debts may be unmanageable.

The new leader’s election win in the party vote is likely amplifying apprehensions that government officials may try to boost output through higher borrowing and lower interest rates, and depend on rising prices to erode the value of the resulting debt.

Trading Update

Tokyo’s bourse has rallied to unprecedented levels this morning, with the currency dropping, after the chief role of the LDP went unexpectedly to by fiscal dove Sanae Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has sparked a wave of enthusiastic buying driving the Tokyo stock index higher by five percent, adding over 2300 points to finish at 48,085.

Yet the Japanese yen is very much moving the opposite way – it has fallen nearly two percent versus the dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be Japan’s first female prime minister later this month, has long admired of Margaret Thatcher. However, while she holds conservative views regarding social issues, she takes an un-Thatcherite approach in economic policy, and supports higher state investment and easy money policies.

As such, markets predict to maintain the country’s drive to spur activity though fiscal spending and lower interest rates, which would lead to increased price pressures and increased borrowing.

Thus the weaker yen, as markets predict less monetary tightening from the Bank of Japan relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, driving higher the interest rate on thirty-year bonds near to record highs, because of predictions of increased debt issuance and lasting price increases.

Investors are assessing how closely Takaichi’s proposals will echo the Abenomics strategy pushed by previous leader Shinzo Abe.

A market expert noted:

Unlike in late 2024, she has not engaged from talking up Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her approval of the former PM’s three-arrow strategy.

Markets could then push to obtain clarity on that position, plus the degree of influence she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8.30am BST: European construction data for September
• 9:30 AM UK time: UK construction PMI for September
• 6.30pm BST: BOE chief Andrew Bailey to give keynote speech at an investment conference 2025