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Market Reactions following the Japanese Political Shift

Currency strategists at major investment firms have reportedly closed their strategies to hold a long position regarding the Japanese yen following Japan’s leading political group selected Sanae Takaichi to be its chief.

In a report titled “Exiting the yen,” one chief for foreign exchange commented:

We went long JPY within our portfolio but have now exited due to the LDP election outcome. The unexpected win by Takaichi reintroduces significant doubt regarding Japanese economic goals as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing on how it will be dealt with.

The analyst additionally noted evidence of political control in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

The gold price are hitting new all-time peaks, once more, in its strongest year since 1979.

The current price of bullion has jumped by 1% or more today reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows the gold price has jumped fifty percent since January 1st, heading for its strongest yearly performance since the late 1970s.

The metal has risen this year because of various drivers, such as increasing fears that public borrowing cannot be maintained.

Takaichi’s election win in the Japanese election will only have reinforced worries that leaders will attempt to stimulate the economy via increased debt and reduced rates, and rely on inflation to erode the value of the resulting debt.

Trading Update

Japan’s stock market has jumped to a record high this morning, while the yen is plunging, after the leadership of the LDP went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a leader supporting government spending has triggered a wave of enthusiastic buying driving the Tokyo stock index to a 5% gain, adding more than 2300 points ending at just over 48,000.

But the yen is very much moving in the other direction – it’s down almost 2% relative to the USD to 150.3 yen per dollar.

Sanae Takaichi, who should become the first woman to lead Japan later this month, is a known fan of the former UK leader. However, while her social policies are right-leaning regarding social issues, Takaichi adopts a different strategy on budget matters, and supports higher state investment and easy money policies.

As such, she’s expected to persist with the country’s drive to stimulate its economy though fiscal spending and cheap credit, which would lead to increased price pressures and greater borrowing.

Thus yen depreciation, as markets predict reduced rate increases from the Bank of Japan relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, pushing up the interest rate on long-term Japanese bonds close to all-time highs, on expectations of increased debt issuance and lasting price increases.

Investors will be calculating to what extent the new leader’s proposals will echo the Abenomics strategy advocated by previous leader Shinzo Abe.

One analyst noted:

Different from previous comments, Takaichi has refrained from talking up the Abenomics program in this LDP leadership campaign, but many are aware her core beliefs and her appreciation of Abe’s Three Arrows philosophy.

Markets could then push to gain understanding on her policies, and how much impact she might become in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is seen as a “live” affair with a quarter-point increase seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: European construction data for September
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to deliver address at a financial forum 2025