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Market Reactions to Japan's Political Shift

Foreign exchange experts at prominent banks have terminated their previous strategies to hold an optimistic view regarding Japan’s currency after the country’s governing party chose Sanae Takaichi to be its chief.

In commentary titled “Getting out of the yen,” one global head for currency analysis stated:

We went long JPY as part of our strategy but are now getting out after the LDP election outcome. Takaichi’s unforeseen success creates too much uncertainty regarding Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflationary pressures exist in Japan, but uncertainty is now going up again about the approach to managing it.

The expert also warned evidence of political control within Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Closes In On the $4,000/oz Threshold

Gold prices are hitting unprecedented levels, today, during its best performance in over four decades.

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

This shows bullion prices has increased fifty percent since January 1st, heading for its top annual returns since the late 1970s.

Bullion has advanced in recent months by several factors, including rising concerns that public borrowing may be unmanageable.

Takaichi’s election win in the party vote will only have reinforced worries that leaders may try to stimulate the economy through higher borrowing and lower interest rates, and rely on inflation to diminish the worth of new borrowings.

Trading Update

Tokyo’s bourse has jumped to an all-time peak in Monday trading, while the yen is plunging, following the top position of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that Sanae Takaichi is likely to be a pro-stimulus prime minister has triggered a surge of optimistic trading that has pushed the Tokyo stock index up by 5%, adding 2315 points to finish at 48,085 points.

But the yen is heading in the other direction – it dropped almost 2% relative to the USD reaching 150.3 against the greenback.

The incoming leader, who is expected to become the first woman to lead Japan soon, is a known fan of Thatcher. Yet even though she holds conservative views regarding social issues, she follows a contrasting path in economic policy, and promotes increased public expenditure and loose monetary policy.

Consequently, analysts anticipate to persist with Japan’s push to boost economic growth though fiscal spending and lower interest rates, likely resulting in increased price pressures and increased borrowing.

As a result the falling currency, with traders expecting less monetary tightening by Japanese authorities than before.

The nation’s debt securities are also down this session, pushing up the yield on long-term Japanese bonds close to all-time highs, due to forecasts of more government loans and more persistent inflation.

The markets will be calculating to what extent the new leader’s proposals will mirror the policies of Shinzo Abe advocated by former PM Abe.

A market expert explained:

In contrast to last year, the leader has avoided from promoting Abenomics in this LDP leadership campaign, but most know her fundamental position and her support of Shinzo Abe’s three-pillar approach.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she could be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is seen as a key event and a rate rise considered likely...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: UK building sector data for September
• 6:30 PM UK time: Central bank head Andrew Bailey to deliver address at a financial forum 2025