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Financial Market Response to the Japanese Ruling Party Vote

Foreign exchange experts at leading banks have reportedly exited their recommendations for holding an optimistic view on the Japanese yen following Japan’s ruling party elected Sanae Takaichi as its chief.

In a note titled “Leaving yen positions,” one lead strategist of FX research explained:

We held a long yen position as part of our strategy but have closed this due to the party leadership vote. The unexpected win by Takaichi brings back renewed unpredictability regarding Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist additionally noted evidence of political control in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Approaches $4,000 per ounce Threshold

The gold price are hitting unprecedented levels, today, in its strongest year since the late 1970s.

The spot price of bullion has surged by 1% or more in recent trading at $3,944 an ounce, as it closes in on the $4000/oz mark.

This indicates the gold price has jumped fifty percent since January 1st, on track for its best annual gains since the Iranian Revolution.

Gold has been driven higher in recent months because of various drivers, among them increasing fears that government debts are unsustainable.

Takaichi’s success in the party vote is likely amplifying worries that leaders will attempt to boost output via increased debt and reduced rates, and use inflation to reduce the real value of new borrowings.

Market Overview

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

Expectations that Sanae Takaichi is likely to be a pro-stimulus prime minister has sparked a surge of optimistic trading that has pushed Japan’s benchmark index to a 5% gain, rising by over 2300 points to close at 48,085.

However, the currency is very much moving downward – it’s down nearly two percent against the US dollar reaching 150.3 against the greenback.

The incoming leader, who is expected to become Japan’s first female prime minister in the coming weeks, has long admired of Margaret Thatcher. However, while she holds conservative views regarding social issues, the new leader adopts a different strategy to fiscal policy, and supports a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to continue Japan’s push to boost economic growth though fiscal spending and reduced borrowing costs, potentially causing rising inflation and greater borrowing.

Thus the weaker yen, as investors anticipate less monetary tightening in Tokyo than before.

Japan’s government bond values are also down this session, driving higher the interest rate on its 30-year debt close to record highs, due to forecasts of more government loans and lasting price increases.

The markets are assessing how closely Sanae Takaichi’s plans will mirror the policies of Shinzo Abe implemented by former PM Abe.

One analyst noted:

Unlike in late 2024, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but experts understand her core beliefs and her support of Abe’s Three Arrows approach.

Investors might thus seek to gain understanding regarding her stance, as well as exactly how influential she might become in shaping monetary policy, given the October BoJ meeting is considered a “live” affair and a 25bp hike considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for September
• 9.30am BST: UK building sector data for September
• 6.30pm BST: Bank of England governor Andrew Bailey to give keynote speech at a financial forum 2025