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Market Reactions to Japan's Political Shift

FX analysts at prominent financial institutions have terminated their positions to hold an optimistic view regarding Japan’s currency after the country’s ruling party selected Takaichi as the new leader.

In a note called “Exiting the yen,” a global head for foreign exchange commented:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success brings back too much uncertainty concerning the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist for Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert also warned that signs of fiscal dominance in Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000 Threshold

Bullion values are reaching fresh record highs, again, during its best performance since 1979.

The current price of gold has surged more than 1 percent this morning at $3,944 an ounce, as it closes in on the $4000/oz mark.

This indicates gold’s value has increased half again since January 1st, likely to achieve its top annual returns since the Iranian Revolution.

The metal has risen this year due to multiple reasons, among them rising concerns that government debts may be unmanageable.

Sanae Takaichi’s election win in Japan is likely amplifying worries that government officials could seek to boost output through higher borrowing and cheaper credit, and use inflation to erode the value of accumulated debt.

Trading Update

Japan’s stock market has rallied to unprecedented levels this morning, as the yen falls, following the top position of the country’s ruling party was surprisingly won by stimulus supporter Takaichi.

Forecasts that Takaichi will become a PM favoring economic stimulus has sparked a surge of optimistic trading driving the Nikkei 225 share index up by 5%, rising by over 2300 points to close at 48,085 points.

Yet the Japanese yen is heading downward – it’s down nearly two percent relative to the USD to 150.3 yen per dollar.

The incoming leader, who should become Japan’s first female prime minister in the coming weeks, is a known fan of Thatcher. However, while she holds conservative views in social matters, the new leader adopts a different strategy on budget matters, and promotes a revival of government spending and accommodative central bank measures.

As such, she’s expected to maintain the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, likely resulting in higher inflation and greater borrowing.

Hence the falling currency, as markets predict reduced rate increases from the Bank of Japan relative to previous forecasts.

The nation’s debt securities have also fallen this session, driving higher the interest rate on long-term Japanese bonds near to all-time highs, because of predictions of increased debt issuance and sustained inflationary pressures.

The markets will be calculating to what extent Takaichi’s policies will resemble the Abenomics strategy pushed by ex-prime minister Shinzo Abe.

A market expert noted:

Unlike in late 2024, the leader has avoided from promoting the Abenomics program in this LDP leadership campaign, but experts understand her fundamental position and her support of the former PM’s three-arrow strategy.

Traders may therefore move to gain understanding on her policies, and how much impact she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is considered a “live” affair and a 25bp hike potentially on the table...

Today’s Schedule

• 8:30 AM UK time: European construction data for last month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit this year