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Financial Market Response following Japan's Ruling Party Vote

Currency strategists at major investment firms have closed their previous recommendations to hold an optimistic view regarding the yen following Japan’s ruling party selected Sanae Takaichi as its leader.

In a report called “Leaving yen positions,” one global head for currency analysis commented:

We held a long yen position in our FX Blueprint but are now getting out following the LDP election outcome. The unexpected win by Takaichi brings back renewed unpredictability concerning the nation’s policy focus and the expected date of BoJ monetary tightening.

Analysts concur that inflation is a problem within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The analyst further cautioned that signs of fiscal dominance in Japan (where the government controls the central bank’s actions) are a tail risk.

Gold Nears the $4,000/oz Mark

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

The spot price of gold has surged more than 1 percent in recent trading reaching $3,944/oz, as it closes in on the $4,000 per ounce level.

This shows gold’s value has surged by 50% from the beginning of the year, likely to achieve its best annual gains in over 45 years.

Bullion has advanced in recent months by several factors, such as increasing fears that national debt levels may be unmanageable.

Sanae Takaichi’s success in the party vote will only have reinforced concerns that politicians may try to boost output through higher borrowing and reduced rates, and use inflation to reduce the real value of the resulting debt.

Trading Update

Tokyo’s bourse has surged to an all-time peak today, with the currency dropping, following the leadership of the country’s ruling party was surprisingly won by spending advocate Sanae Takaichi.

Predictions that Takaichi is likely to be a leader supporting government spending has triggered a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, rising by over 2300 points to finish at 48,085 points.

However, the currency is very much moving the opposite way – it’s down about 2 percent versus the dollar at 150.3¥/$.

Takaichi, who is expected to become the nation’s initial woman PM soon, is a known fan of Thatcher. But although her social policies are right-leaning regarding social issues, she takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and easy money policies.

Therefore, markets predict to persist with the country’s drive to spur activity through public investment and lower interest rates, likely resulting in increased price pressures and greater borrowing.

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

Japanese long-term bond prices are also down in Monday trading, lifting the yield on thirty-year bonds close to peak levels, because of predictions of increased debt issuance and lasting price increases.

Investors are evaluating how closely the new leader’s policies will echo the “Abenomics” programme implemented by ex-prime minister Abe.

A market expert explained:

Different from previous comments, she has not engaged from highlighting the Abenomics program during the party election, but most know her core beliefs and her approval of the former PM’s three-pillar philosophy.

Markets could then push for more information on her policies, and how much impact she might become in shaping monetary policy, given the October BoJ meeting is viewed as a potential turning point and a 25bp hike potentially on the table...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to give keynote speech at an investment conference 2025