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Financial Market Response to the Japanese Leadership Election

Currency strategists from prominent investment firms have reportedly closed their previous strategies for holding an optimistic view regarding the Japanese yen after Japan’s leading political group elected Takaichi to be its chief.

In a report named “Exiting the yen,” one lead strategist for foreign exchange stated:

We went long JPY in our FX Blueprint but have closed this following the party leadership vote. Sanae Takaichi’s surprise victory brings back too much uncertainty concerning the nation’s policy focus and the expected date of BoJ monetary tightening.

Experts agree that inflation is a problem within the Japanese economy, but uncertainty is now going up again on how it will be dealt with.

The strategist further cautioned evidence of political control within Japan (where the government controls monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Level

Bullion values are reaching unprecedented levels, again, in its top-performing period since the late 1970s.

The immediate value of bullion has surged by 1% or more this morning to $3,944 per ounce, nearing the $4,000 per ounce level.

This indicates gold’s value has surged fifty percent since January 1st, on track for its strongest yearly performance since the late 1970s.

Bullion has advanced this year due to multiple reasons, among them rising concerns that national debt levels may be unmanageable.

The new leader’s victory in the party vote will only have reinforced worries that government officials may try to stimulate the economy through higher borrowing and lower interest rates, and depend on rising prices to diminish the worth of accumulated debt.

Trading Update

Japan’s stock market has jumped to a record high today, as the yen falls, following the leadership of the LDP was surprisingly won by spending advocate Takaichi.

Predictions that Sanae Takaichi is likely to be a leader supporting government spending has ignited a rush of positive investment driving the Nikkei 225 share index to a 5% gain, rising by more than 2300 points to close at 48,085.

Yet the Japanese yen is trending in the other direction – it has fallen almost 2% against the US dollar at 150.3¥/$.

Sanae Takaichi, set to be the first woman to lead Japan later this month, is a long-time admirer of Margaret Thatcher. Yet even though she holds conservative views on social policy, the new leader adopts a different strategy in economic policy, and has advocate higher state investment and accommodative central bank measures.

Therefore, she’s expected to maintain the national effort to stimulate its economy though fiscal spending and lower interest rates, potentially causing rising inflation and greater borrowing.

As a result the weaker yen, as investors anticipate fewer interest rates hikes by Japanese authorities relative to previous forecasts.

Japan’s government bond values are also down this session, lifting the yield on thirty-year bonds approaching peak levels, on expectations of higher borrowing and lasting price increases.

Investors are assessing how closely the new leader’s proposals will resemble the policies of Shinzo Abe implemented by former PM Shinzo Abe.

A market expert commented:

Unlike in late 2024, Takaichi has refrained from highlighting Abenomics in the recent vote, but experts understand her underlying stance and her approval of Abe’s three-pillar strategy.

Traders may therefore move to gain understanding on her policies, plus the degree of influence she may be in directing monetary policy, given the October BoJ meeting is seen as a potential turning point and a 25bp hike seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 9.30am BST: UK construction PMI for September
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to give keynote speech at a financial forum this year