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Market Reactions following Japan's Ruling Party Vote

FX analysts at prominent financial institutions have closed their previous recommendations for holding a bullish stance on the yen following the country’s ruling party elected Sanae Takaichi as the new chief.

In a note named “Leaving yen positions,” one global head of FX research explained:

We went long JPY in our FX Blueprint but have now exited after the LDP election outcome. The unexpected win by Takaichi creates renewed unpredictability around Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflationary pressures exist in Japan, but questions are mounting regarding how it will be addressed.

The expert also warned evidence of political control across Japan (where the government controls the central bank’s actions) represent a downside risk.

Gold Nears the $4,000 Mark

The gold price are hitting new all-time peaks, today, in its top-performing period in over four decades.

The current price of the precious metal has jumped by 1% or more this morning to $3,944 per ounce, nearing the $4000/oz mark.

This indicates the gold price has increased by 50% since January 1st, heading for its best annual gains in over 45 years.

The metal has risen in recent months by several factors, such as rising concerns that national debt levels cannot be maintained.

The new leader’s success in Japan is likely amplifying apprehensions that politicians may try to stimulate the economy via increased debt and lower interest rates, and rely on inflation to reduce the real value of new borrowings.

Market Overview

Japan’s stock market has jumped to an all-time peak in Monday trading, while the yen is plunging, after the leadership of the LDP went unexpectedly to by fiscal dove Takaichi.

Forecasts that Takaichi is likely to be a pro-stimulus prime minister has ignited a surge of optimistic trading lifting the Nikkei 225 share index up by 5%, as it gained more than 2300 points ending at 48,085 points.

Yet the Japanese yen is very much moving in the other direction – it’s down about 2 percent versus the dollar reaching 150.3 against the greenback.

Sanae Takaichi, who should become Japan’s first female prime minister later this month, is a long-time admirer of Margaret Thatcher. But although her social policies are right-leaning in social matters, the new leader takes an un-Thatcherite approach to fiscal policy, and supports higher state investment and easy money policies.

As such, markets predict to continue the national effort to stimulate its economy though fiscal spending and reduced borrowing costs, which would lead to higher inflation and increased borrowing.

Thus the weaker yen, as investors anticipate fewer interest rates hikes in Tokyo than before.

Japan’s government bond values have also fallen in Monday trading, pushing up the yield on long-term Japanese bonds near to all-time highs, because of predictions of more government loans and sustained inflationary pressures.

Investors are assessing the degree to which the new leader’s proposals will echo the policies of Shinzo Abe advocated by previous leader Abe.

A brokerage head noted:

In contrast to last year, the leader has avoided from promoting Abenomics in the recent vote, but most know her core beliefs and her approval of Abe’s Three Arrows strategy.

Investors might thus seek to gain understanding on her policies, and how much impact she could be in forming the BoJ’s policy thinking, 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: European construction data for last month
• 9.30am BST: British construction figures for the last month
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at a financial forum 2025