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Financial Market Response to Japan's Political Shift

Currency strategists from major investment firms have closed their positions for holding a long position on Japan’s currency after Japan’s ruling party elected Takaichi to be its head.

In a note titled “Getting out of the yen,” one lead strategist for currency analysis explained:

We held a long yen position within our portfolio but have now exited due to the weekend’s election result. Takaichi’s unforeseen success creates significant doubt around the nation’s policy focus as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem in Japan, but doubts are resurfacing on how it will be dealt with.

The expert also warned indicators of government influence in Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Nears the $4,000 Level

The gold price are hitting new all-time peaks, again, during its best performance since the late 1970s.

The current price of bullion has jumped more than 1 percent today at $3,944 an ounce, nearing the $4,000 threshold.

This shows bullion prices has increased half again from the beginning of the year, heading for its best annual gains in over 45 years.

Gold has been driven higher in recent months due to multiple reasons, among them rising concerns that public borrowing may be unmanageable.

Sanae Takaichi’s success in Japan is likely amplifying concerns that government officials will attempt to stimulate the economy through higher borrowing and cheaper credit, and depend on rising prices to reduce the real value of accumulated debt.

Market Overview

The Japanese equity market has rallied to a record high in Monday trading, as the yen falls, after the leadership of the LDP was surprisingly won by fiscal dove Takaichi.

Predictions that the new leader is likely to be a PM favoring economic stimulus has ignited a rush of positive investment that has pushed Japan’s benchmark index to a 5% gain, adding over 2300 points ending at 48,085 points.

However, the currency is heading in the other direction – it has fallen nearly two percent relative to the USD to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become Japan’s first female prime minister in the coming weeks, has long admired of Margaret Thatcher. However, while she holds conservative views regarding social issues, the new leader takes an un-Thatcherite approach in economic policy, and supports a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to continue the country’s drive to stimulate its economy via government outlays and lower interest rates, which would lead to higher inflation and increased borrowing.

Hence the weaker yen, as markets predict reduced rate increases by Japanese authorities than before.

Japan’s government bond values have also fallen this session, pushing up the return on thirty-year bonds near to record highs, due to forecasts of higher borrowing and more persistent inflation.

Investors are evaluating how closely Sanae Takaichi’s proposals will mirror the “Abenomics” programme advocated by ex-prime minister Shinzo Abe.

A brokerage head noted:

Unlike in late 2024, Takaichi has refrained from talking up the three-arrow strategy in this LDP leadership campaign, but experts understand her core beliefs and her appreciation of Shinzo Abe’s Three Arrows approach.

Investors might thus seek to obtain clarity on that position, and how much impact she may be in directing monetary policy, given the October BoJ meeting is considered a “live” affair with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for September
• 09:30 BST: British construction figures for September
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to deliver address at a financial forum 2025