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Market Reactions to the Japanese Political Shift

Currency strategists at major financial institutions have exited their recommendations to hold a bullish stance on Japan’s currency after the country’s ruling party elected Sanae Takaichi to be its head.

In a report called “Exiting the yen,” a global head of FX research explained:

Our strategy was bullish on the yen in our FX Blueprint but have closed this due to the weekend’s election result. The unexpected win by Takaichi reintroduces renewed unpredictability concerning the nation’s policy focus as well as the schedule for BoJ monetary tightening.

There is agreement that inflationary pressures exist for Japan, but questions are mounting on how it will be dealt with.

The strategist additionally noted indicators of government influence within Japan (where the government controls the central bank’s actions) are a tail risk.

Gold Approaches the $4,000/oz Level

Gold prices are achieving unprecedented levels, once more, in its strongest year since the late 1970s.

The current price of bullion has climbed more than 1 percent today at $3,944 an ounce, approaching the $4,000 per ounce level.

This indicates gold’s value has increased by 50% since January 1st, on track for its best annual gains in over 45 years.

Gold has been driven higher this year due to multiple reasons, among them growing worries that national debt levels may be unmanageable.

Takaichi’s election win in the party vote will only have reinforced apprehensions that politicians could seek to boost output by borrowing more and cheaper credit, and depend on rising prices to erode the value of new borrowings.

Financial Summary

The Japanese equity market has surged to a record high in Monday trading, while the yen is plunging, following the top position of the country’s ruling party was unexpectedly secured by fiscal dove Sanae Takaichi.

Forecasts that Takaichi will become a leader supporting government spending has ignited a surge of optimistic trading driving the Nikkei 225 share index up by 5%, as it gained more than 2300 points ending at 48,085.

Yet the Japanese yen is very much moving the opposite way – it has fallen almost 2% versus the dollar at 150.3¥/$.

Sanae Takaichi, who should become the first woman to lead Japan soon, is a known fan of the former UK leader. Yet even though she is conservative in social matters, Takaichi takes an un-Thatcherite approach in economic policy, and has advocate higher state investment and loose monetary policy.

As such, analysts anticipate to persist with the national effort to spur activity via government outlays and lower interest rates, potentially causing rising inflation and increased borrowing.

As a result the falling currency, as markets predict reduced rate increases in Tokyo than before.

Japanese long-term bond prices have declined this session, lifting the return on its 30-year debt near to all-time highs, on expectations of higher borrowing and sustained inflationary pressures.

The markets are assessing the degree to which Sanae Takaichi’s policies will mirror the policies of Shinzo Abe advocated by ex-prime minister Abe.

A market expert explained:

Unlike in late 2024, the leader has avoided from highlighting Abenomics during the party election, but experts understand her core beliefs and her approval of Shinzo Abe’s three-pillar philosophy.

Traders may therefore move to obtain clarity on her policies, and how much impact she could be in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a “live” affair and a rate rise potentially on the table...

Economic Calendar

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for September
• 6.30pm BST: Bank of England governor Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit 2025