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Financial Market Response to the Japanese Leadership Election

Foreign exchange experts at major financial institutions have closed their recommendations to hold an optimistic view on the Japanese yen following the country’s ruling party elected Sanae Takaichi as the new head.

In a note titled “Leaving yen positions,” a lead strategist for foreign exchange stated:

We held a long yen position as part of our strategy but are now getting out due to the LDP election outcome. The unexpected win by Takaichi creates significant doubt around Japanese economic goals as well as the schedule for BoJ monetary tightening.

Analysts concur that inflation is a problem within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The analyst additionally noted that signs of fiscal dominance across Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Closes In On the $4,000 Mark

Gold prices are achieving new all-time peaks, once more, during its best performance since the late 1970s.

The immediate value of gold has jumped by 1% or more this morning reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows gold’s value has surged half again since the start of January, heading for its top annual returns in over 45 years.

The metal has risen in recent months due to multiple reasons, such as growing worries that national debt levels are unsustainable.

Sanae Takaichi’s victory in the Japanese election is likely amplifying apprehensions that politicians will attempt to stimulate the economy by borrowing more and cheaper credit, and use inflation to reduce the real value of new borrowings.

Trading Update

Tokyo’s bourse has rallied to an all-time peak in Monday trading, while the yen is plunging, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that Takaichi will become a PM favoring economic stimulus has ignited a rush of positive investment lifting the Tokyo stock index to a 5% gain, adding over 2300 points ending at 48,085.

Yet the Japanese yen is trending in the other direction – it has fallen nearly two percent relative to the USD reaching 150.3 against the greenback.

Takaichi, who should become the nation’s initial woman PM in the coming weeks, is a long-time admirer of Thatcher. However, while she is conservative regarding social issues, she takes an un-Thatcherite approach on budget matters, and has advocate higher state investment and accommodative central bank measures.

As such, she’s expected to persist with the national effort to spur activity through public investment and reduced borrowing costs, likely resulting in higher inflation and increased borrowing.

As a result yen depreciation, with traders expecting fewer interest rates hikes by Japanese authorities compared to earlier expectations.

The nation’s debt securities have declined this session, pushing up the interest rate on long-term Japanese bonds close to peak levels, because of predictions of higher borrowing and more persistent inflation.

Traders are assessing how closely Takaichi’s proposals will resemble the policies of Shinzo Abe advocated by former PM Abe.

A brokerage head noted:

Different from previous comments, she has not engaged from talking up the three-arrow strategy in the recent vote, but many are aware her fundamental position and her appreciation of Abe’s Three Arrows approach.

Traders may therefore move to gain understanding regarding her stance, plus the degree of influence she may be in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a key event with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8.30am BST: European construction data for September
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to speak at an investment conference 2025