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Market Reactions to the Japanese Leadership Election

FX analysts at leading investment firms have reportedly closed their positions to hold a bullish stance regarding the yen after Japan’s leading political group selected Takaichi as its chief.

In commentary called “Leaving yen positions,” one lead strategist for currency analysis stated:

We held a long yen position as part of our strategy but have now exited due to the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces too much uncertainty around 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 in Japan, but doubts are resurfacing on how it will be dealt with.

The expert additionally noted evidence of political control across Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000 Threshold

Bullion values are reaching unprecedented levels, once more, during its best performance since the late 1970s.

The immediate value of gold has jumped more than 1 percent in recent trading to $3,944 per ounce, as it closes in on the $4000/oz mark.

This shows the gold price has jumped fifty percent since January 1st, likely to achieve its top annual returns since the Iranian Revolution.

Bullion has advanced this year due to multiple reasons, such as growing worries that public borrowing may be unmanageable.

The new leader’s success in the party vote will only have reinforced apprehensions that politicians could seek to stimulate the economy by borrowing more and cheaper credit, and rely on inflation to erode the value of new borrowings.

Trading Update

Tokyo’s bourse has rallied to an all-time peak this morning, as the yen falls, after the chief role of the LDP went unexpectedly to by fiscal dove Takaichi.

Expectations that the new leader will be a PM favoring economic stimulus has ignited a rush of positive investment that has pushed the Tokyo stock index to a 5% gain, as it gained more than 2300 points to finish at just over 48,000.

Yet the Japanese yen is very much moving in the other direction – it’s down almost 2% against the US dollar to 150.3 yen per dollar.

The incoming leader, set to be Japan’s first female prime minister in the coming weeks, is a long-time admirer of Thatcher. Yet even though her social policies are right-leaning in social matters, the new leader takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and easy money policies.

Consequently, she’s expected to continue Japan’s push to stimulate its economy though fiscal spending and cheap credit, which would lead to rising inflation and greater borrowing.

Hence the weaker yen, as investors anticipate less monetary tightening in Tokyo than before.

The nation’s debt securities are also down in Monday trading, driving higher the yield on long-term Japanese bonds close to peak levels, on expectations of more government loans and more persistent inflation.

Traders are evaluating the degree to which Takaichi’s policies will mirror the “Abenomics” programme advocated by ex-prime minister Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but most know her fundamental position and her approval of the former PM’s Three Arrows strategy.

Traders may therefore move to obtain clarity regarding her stance, plus the degree of influence she might become in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is seen as a “live” affair and a rate rise seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for September
• 9.30am BST: UK construction PMI for the last month
• 6:30 PM UK time: BOE chief the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit 2025