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Market Reactions to Japan's Political Shift

Foreign exchange experts at prominent financial institutions have exited their positions to hold a long position regarding the Japanese yen after Japan’s leading political group selected Sanae Takaichi as its head.

In a report titled “Getting out of the yen,” a global head for foreign exchange stated:

Our strategy was bullish on the yen in our FX Blueprint but have now exited following the party leadership vote. Sanae Takaichi’s surprise victory brings back renewed unpredictability regarding Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The strategist further cautioned evidence of political control within Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Nears the $4,000 Threshold

Gold prices are hitting new all-time peaks, once more, in its top-performing period since 1979.

The immediate value of bullion has surged by 1% or more this morning at $3,944 an ounce, approaching the $4000/oz mark.

This shows bullion prices has increased by 50% since January 1st, on track for its strongest yearly performance since the late 1970s.

Bullion has advanced in recent months because of various drivers, such as growing worries that national debt levels may be unmanageable.

The new leader’s election win in Japan will only have reinforced worries that leaders could seek to boost output through higher borrowing and reduced rates, and use inflation to diminish the worth of the resulting debt.

Trading Update

Tokyo’s bourse has jumped to unprecedented levels today, while the yen is plunging, after the chief role of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that Sanae Takaichi will become a leader supporting government spending has sparked a surge of optimistic trading lifting the Tokyo stock index higher by five percent, as it gained 2315 points to close at just over 48,000.

However, the currency is heading the opposite way – it dropped about 2 percent against the US dollar at 150.3¥/$.

Sanae Takaichi, set to be the nation’s initial woman PM soon, is a known fan of Margaret Thatcher. However, while she holds conservative views in social matters, the new leader follows a contrasting path in economic policy, and has advocate increased public expenditure and accommodative central bank measures.

As such, markets predict to persist with the national effort to stimulate its economy though fiscal spending and lower interest rates, which would lead to higher inflation and increased borrowing.

Thus yen depreciation, as markets predict less monetary tightening in Tokyo relative to previous forecasts.

Japanese long-term bond prices have declined this session, pushing up the return on its 30-year debt close to peak levels, due to forecasts of increased debt issuance and more persistent inflation.

The markets will be calculating how closely the new leader’s policies will resemble the policies of Shinzo Abe pushed by ex-prime minister Shinzo Abe.

A brokerage head explained:

Unlike in late 2024, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her core beliefs and her appreciation of Shinzo Abe’s Three Arrows strategy.

Investors might thus seek to gain understanding on that position, as well as exactly how influential she may be in directing the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a key event and a rate rise considered likely...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 09:30 BST: UK building sector data for the last month
• 6.30pm BST: BOE chief Andrew Bailey to give keynote speech at an investment conference this year