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Market Reactions to Japan's Political Shift

Foreign exchange experts at leading investment firms have reportedly terminated their strategies for holding a bullish stance on the Japanese yen after Japan’s governing party elected Sanae Takaichi as its leader.

In commentary named “Exiting the yen,” a global head for currency analysis commented:

We went long JPY within our portfolio but have closed this after the LDP election outcome. Takaichi’s unforeseen success creates significant doubt concerning Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

There is agreement that rising prices are an issue for Japan, but questions are mounting regarding how it will be addressed.

The expert further cautioned that signs of fiscal dominance within Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Nears $4,000 per ounce Mark

The gold price are reaching new all-time peaks, once more, in its strongest year in over four decades.

The spot price of the precious metal has surged by over 1% in recent trading reaching $3,944/oz, as it closes in on the $4,000 threshold.

This shows gold’s value has surged half again since January 1st, on track for its best annual gains since the Iranian Revolution.

The metal has risen throughout the year because of various drivers, such as growing worries that government debts cannot be maintained.

Sanae Takaichi’s victory in the Japanese election has further strengthened apprehensions that politicians could seek to boost output via increased debt and reduced rates, and use inflation to reduce the real value of accumulated debt.

Market Overview

Tokyo’s bourse has surged to unprecedented levels this morning, as the yen falls, following the top position of the governing party was unexpectedly secured by spending advocate Sanae Takaichi.

Predictions that the new leader is likely to be a leader supporting government spending has sparked a wave of enthusiastic buying lifting the Tokyo stock index up by 5%, adding more than 2300 points to finish at 48,085 points.

Yet the Japanese yen is heading downward – it’s down about 2 percent relative to the USD at 150.3¥/$.

Sanae Takaichi, who should become Japan’s first female prime minister later this month, is a long-time admirer of Margaret Thatcher. Yet even though her social policies are right-leaning on social policy, she follows a contrasting path to fiscal policy, and has advocate higher state investment and accommodative central bank measures.

As such, markets predict to maintain Japan’s push to boost economic growth though fiscal spending and reduced borrowing costs, likely resulting in higher inflation and more debt.

Hence the falling currency, with traders expecting fewer interest rates hikes by Japanese authorities relative to previous forecasts.

The nation’s debt securities have also fallen today, lifting the yield on thirty-year bonds near to peak levels, because of predictions of increased debt issuance and lasting price increases.

Traders are assessing the degree to which Sanae Takaichi’s plans will resemble the Abenomics strategy implemented by previous leader Abe.

A brokerage head commented:

Unlike in late 2024, the leader has avoided from talking up the three-arrow strategy during the party election, but many are aware her fundamental position and her appreciation of Abe’s three-pillar approach.

Markets could then push for more information on her policies, as well as exactly how influential she may be in directing monetary policy, given the October BoJ meeting is considered a key event and a rate rise potentially on the table...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for the previous month
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Bank of England governor Bailey to give keynote speech at a financial forum this year