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Financial Market Response following Japan's Political Shift

Foreign exchange experts at prominent investment firms have reportedly exited their previous positions to hold an optimistic view regarding the Japanese yen following the country’s ruling party elected Sanae Takaichi to be its head.

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

We held a long yen position as part of our strategy but have now exited due to the weekend’s election result. The unexpected win by Takaichi reintroduces renewed unpredictability concerning Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem within the Japanese economy, but questions are mounting on how it will be dealt with.

The strategist also warned evidence of political control in Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Closes In On $4,000 per ounce Threshold

Gold prices are achieving unprecedented levels, today, during its best performance since 1979.

The immediate value of gold has climbed more than 1 percent this morning to $3,944 per ounce, as it closes in on the $4,000 threshold.

This shows the gold price has jumped fifty percent from the beginning of the year, on track for its top annual returns since the late 1970s.

Gold has been driven higher throughout the year due to multiple reasons, such as rising concerns that public borrowing cannot be maintained.

Takaichi’s success in the party vote will only have reinforced concerns that government officials could seek to boost output by borrowing more and cheaper credit, and depend on rising prices to reduce the real value of new borrowings.

Financial Summary

The Japanese equity market has surged to unprecedented levels in Monday trading, with the currency dropping, after the leadership of the governing party went unexpectedly to by fiscal dove Sanae Takaichi.

Expectations that Takaichi will be a PM favoring economic stimulus has triggered a surge of optimistic trading driving the Tokyo stock index up by 5%, as it gained over 2300 points to close at 48,085 points.

But the yen is heading in the other direction – it has fallen almost 2% versus the dollar to 150.3 yen per dollar.

The incoming leader, set to be Japan’s first female prime minister soon, is a known fan of Margaret Thatcher. However, while she holds conservative views in social matters, she follows a contrasting path to fiscal policy, and promotes a revival of government spending and easy money policies.

As such, markets predict to persist with the national effort to boost economic growth though fiscal spending and cheap credit, potentially causing higher inflation and more debt.

Thus yen depreciation, with traders expecting less monetary tightening in Tokyo than before.

Japan’s government bond values have declined in Monday trading, pushing up the interest rate on its 30-year debt approaching all-time highs, on expectations of higher borrowing and sustained inflationary pressures.

Traders will be calculating to what extent the new leader’s plans will resemble the “Abenomics” programme advocated by previous leader Shinzo Abe.

A market expert noted:

In contrast to last year, she has not engaged from highlighting the Abenomics program in this LDP leadership campaign, but experts understand her underlying stance and her approval of Abe’s Three Arrows approach.

Traders may therefore move to gain understanding regarding her stance, plus the degree of influence she might become in directing the central bank’s decisions, with the Bank of Japan’s October session is seen as a key event and a rate rise potentially on the table...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 18:30 BST: Central bank head Andrew Bailey to deliver address at an investment conference 2025