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Market Reactions to the Japanese Ruling Party Vote

Foreign exchange experts from major investment firms have exited their strategies to hold a long position regarding Japan’s currency following the country’s leading political group chose Sanae Takaichi as its head.

In a note titled “Leaving yen positions,” a global head of FX research stated:

We went long JPY in our FX Blueprint but have now exited following the party leadership vote. The unexpected win by Takaichi reintroduces significant doubt regarding Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

Analysts concur that rising prices are an issue for Japan, but questions are mounting on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance within Japan (in which politicians direct the BoJ’s moves) represent a downside risk.

Gold Closes In On the $4,000 Threshold

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

The immediate value of bullion has climbed by 1% or more this morning at $3,944 an ounce, approaching the $4000/oz mark.

This means the gold price has surged half again since the start of January, on track for its top annual returns since the Iranian Revolution.

The metal has risen in recent months due to multiple reasons, such as increasing fears that public borrowing are unsustainable.

The new leader’s election win in the Japanese election has further strengthened worries that government officials will attempt to secure growth via increased debt and lower interest rates, and use inflation to erode the value of new borrowings.

Market Overview

The Japanese equity market has rallied to an all-time peak this morning, while the yen is plunging, after the top position of the governing party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Predictions that Takaichi is likely to be a PM favoring economic stimulus has ignited a surge of optimistic trading driving the Tokyo stock index higher by five percent, as it gained over 2300 points to finish at 48,085.

But the yen is heading downward – it has fallen almost 2% relative to the USD at 150.3¥/$.

Sanae Takaichi, set to be Japan’s first female prime minister soon, has long admired of Margaret Thatcher. But although she holds conservative views on social policy, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes a revival of government spending and loose monetary policy.

Consequently, she’s expected to maintain the national effort to boost economic growth though fiscal spending and cheap credit, likely resulting in higher inflation and greater borrowing.

Hence the weaker yen, as investors anticipate less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined in Monday trading, driving higher the return on thirty-year bonds close to record highs, on expectations of increased debt issuance and lasting price increases.

Investors are evaluating to what extent Sanae Takaichi’s policies will resemble the policies of Shinzo Abe advocated by former PM Abe.

A market expert explained:

Unlike in late 2024, Takaichi has refrained from highlighting the three-arrow strategy during the party election, but many are aware her underlying stance and her appreciation of Abe’s Three Arrows philosophy.

Markets could then push to gain understanding regarding her stance, plus the degree of influence she might become in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a potential turning point with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8.30am BST: Eurozone construction PMI for the previous month
• 9.30am BST: UK construction PMI for the last month
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at an investment conference this year