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Market Reactions following Japan's Ruling Party Vote

Foreign exchange experts from major banks have exited their strategies for holding a bullish stance regarding the Japanese yen following Japan’s governing party selected Sanae Takaichi as the new leader.

In a note called “Getting out of the yen,” one lead strategist for currency analysis commented:

Our strategy was bullish on the yen in our FX Blueprint but have now exited following the weekend’s election result. The unexpected win by Takaichi creates renewed unpredictability regarding the nation’s policy focus as well as the schedule for interest rate increases by the Bank of Japan.

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

The analyst further cautioned that signs of fiscal dominance in Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

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

Gold prices are achieving new all-time peaks, again, in its strongest year since the late 1970s.

The spot price of the precious metal has jumped by over 1% today reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This indicates bullion prices has jumped half again since the start of January, on track for its top annual returns since the late 1970s.

Gold has been driven higher throughout the year by several factors, including rising concerns that public borrowing may be unmanageable.

Takaichi’s success in Japan will only have reinforced worries that leaders could seek to stimulate the economy by borrowing more and cheaper credit, and use inflation to reduce the real value of the resulting debt.

Trading Update

Japan’s stock market has jumped to an all-time peak today, while the yen is plunging, after the chief role of the governing party was surprisingly won by fiscal dove Takaichi.

Expectations that Sanae Takaichi will become a pro-stimulus prime minister has triggered a surge of optimistic trading driving Japan’s benchmark index up by 5%, rising by 2315 points to finish at 48,085 points.

However, the currency is heading the opposite way – it has fallen about 2 percent against the US dollar to 150.3 yen per dollar.

Takaichi, who should become the nation’s initial woman PM later this month, is a long-time admirer of Thatcher. Yet even though she holds conservative views on social policy, Takaichi follows a contrasting path to fiscal policy, and has advocate increased public expenditure and easy money policies.

Consequently, she’s expected to continue the country’s drive to boost economic growth through public investment and lower interest rates, potentially causing rising inflation and greater borrowing.

As a result yen depreciation, with traders expecting fewer interest rates hikes in Tokyo compared to earlier expectations.

Japanese long-term bond prices are also down in Monday trading, pushing up the return on thirty-year bonds near to all-time highs, on expectations of more government loans and sustained inflationary pressures.

The markets are evaluating the degree to which Takaichi’s policies will mirror the policies of Shinzo Abe advocated by previous leader Abe.

A brokerage head explained:

Unlike in late 2024, the leader has avoided from highlighting Abenomics during the party election, but experts understand her core beliefs and her appreciation of Abe’s Three Arrows approach.

Investors might thus seek to obtain clarity on that position, as well as exactly how influential she may be in forming the BoJ’s policy thinking, given the October BoJ meeting is viewed as a “live” affair with a quarter-point increase potentially on the table...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for the previous month
• 09:30 BST: British construction figures for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year