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Financial Market Response following Japan's Leadership Election

Currency strategists at prominent banks have terminated their positions for holding a long position on the Japanese yen following the country’s leading political group chose Takaichi as its chief.

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

We went long JPY as part of our strategy but are now getting out after the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces significant doubt regarding the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem for Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst further cautioned indicators of government influence in Japan (where state authorities influence the central bank’s actions) represent a downside risk.

Gold Nears $4,000 per ounce Threshold

The gold price are reaching new all-time peaks, once more, in its strongest year in over four decades.

The immediate value of bullion has surged by over 1% 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 strongest yearly performance since the Iranian Revolution.

Bullion has advanced this year because of various drivers, among them rising concerns that government debts cannot be maintained.

Sanae Takaichi’s victory in Japan is likely amplifying concerns that government officials may try to secure growth by borrowing more and lower interest rates, and use inflation to diminish the worth of new borrowings.

Trading Update

The Japanese equity market has jumped to an all-time peak in Monday trading, as the yen falls, following the top position of the country’s ruling party went unexpectedly to by fiscal dove Sanae Takaichi.

Predictions that the new leader will become a leader supporting government spending has triggered a wave of enthusiastic buying driving Japan’s benchmark index up by 5%, adding more than 2300 points to close at 48,085 points.

But the yen is trending downward – it has fallen nearly two percent versus the dollar at 150.3¥/$.

Takaichi, set to be the nation’s initial woman PM soon, is a long-time admirer of Thatcher. But although she holds conservative views regarding social issues, the new leader takes an un-Thatcherite approach to fiscal policy, and supports higher state investment and easy money policies.

Consequently, markets predict to persist with Japan’s push to stimulate its economy via government outlays and lower interest rates, potentially causing higher inflation and more debt.

As a result the falling currency, as markets predict less monetary tightening in Tokyo compared to earlier expectations.

Japanese long-term bond prices have also fallen today, lifting the interest rate on thirty-year bonds close to peak levels, due to forecasts of increased debt issuance and more persistent inflation.

The markets are assessing the degree to which the new leader’s proposals will echo the policies of Shinzo Abe pushed by former PM Shinzo Abe.

A brokerage head commented:

In contrast to last year, Takaichi has refrained from promoting the Abenomics program during the party election, but most know her core beliefs and her support of the former PM’s three-arrow approach.

Investors might thus seek to gain understanding regarding her stance, as well as exactly how influential she might become in shaping monetary policy, ahead of the BoJ’s next meeting is seen as a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 8.30am BST: Euro area building activity for the previous month
• 09:30 BST: British construction figures for September
• 18:30 BST: Central bank head Bailey to deliver address at a financial forum 2025