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Market Reactions to Japan's Political Shift

Foreign exchange experts from major financial institutions have reportedly closed their previous recommendations for holding a long position on the Japanese yen following Japan’s leading political group elected Sanae Takaichi as its head.

In a note named “Leaving yen positions,” one lead strategist of FX research stated:

Our strategy was bullish on the yen within our portfolio but have now exited due to the weekend’s election result. Takaichi’s unforeseen success reintroduces renewed unpredictability around the nation’s policy focus as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue for Japan, but uncertainty is now going up again on how it will be dealt with.

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

Gold Approaches the $4,000 Threshold

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

The current price of bullion has surged more than 1 percent in recent trading to $3,944 per ounce, approaching the $4000/oz mark.

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

The metal has risen throughout the year by several factors, including rising concerns that public borrowing may be unmanageable.

Takaichi’s victory in Japan will only have reinforced concerns that government officials could seek to boost output by borrowing more and reduced rates, and rely on inflation to reduce the real value of the resulting debt.

Market Overview

Japan’s stock market has rallied to unprecedented levels in Monday trading, while the yen is plunging, after the leadership of the country’s ruling party was unexpectedly secured by spending advocate Takaichi.

Forecasts that Sanae Takaichi will be a pro-stimulus prime minister has sparked a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, adding 2315 points to finish at just over 48,000.

Yet the Japanese yen is very much moving the opposite way – it’s down nearly two percent versus the dollar reaching 150.3 against the greenback.

The incoming leader, who is expected to become Japan’s first female prime minister later this month, is a known fan of Thatcher. But although she holds conservative views in social matters, Takaichi follows a contrasting path in economic policy, and supports a revival of government spending and loose monetary policy.

Consequently, analysts anticipate to continue the national effort to spur activity via government outlays and cheap credit, likely resulting in increased price pressures and greater borrowing.

Thus the falling currency, with traders expecting less monetary tightening in Tokyo compared to earlier expectations.

Japan’s government bond values have declined this session, pushing up the yield on long-term Japanese bonds approaching all-time highs, due to forecasts of higher borrowing and lasting price increases.

The markets are evaluating how closely the new leader’s proposals will mirror the Abenomics strategy implemented by ex-prime minister Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from talking up the three-arrow strategy during the party election, but most know her underlying stance and her approval of Abe’s three-arrow philosophy.

Investors might thus seek for more information regarding her stance, plus the degree of influence she may be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a key event and a 25bp hike considered likely...

Economic Calendar

• 8.30am BST: Euro area building activity for September
• 9.30am BST: UK building sector data for the last month
• 6:30 PM UK time: Central bank head Andrew Bailey to speak at an investment conference this year