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Financial Market Response following the Japanese Ruling Party Vote

FX analysts from prominent investment firms have reportedly closed their previous strategies for holding an optimistic view regarding the yen following the country’s governing party selected Sanae Takaichi as the new head.

In a note called “Getting out of the yen,” a chief for foreign exchange stated:

We went long JPY in our FX Blueprint but are now getting out after the party leadership vote. Takaichi’s unforeseen success brings back too much uncertainty concerning Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflationary pressures exist for Japan, but questions are mounting on how it will be dealt with.

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

Gold Closes In On the $4,000 Level

The gold price are achieving fresh record highs, again, in its top-performing period since the late 1970s.

The spot price of bullion has surged more than 1 percent this morning at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This means gold’s value has surged by 50% from the beginning of the year, on track for its best annual gains in over 45 years.

Bullion has advanced in recent months because of various drivers, including growing worries that national debt levels cannot be maintained.

Sanae Takaichi’s victory in Japan is likely amplifying concerns that government officials could seek to stimulate the economy by borrowing more and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Financial Summary

The Japanese equity market has surged to an all-time peak this morning, as the yen falls, after the top position of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Predictions that Takaichi is likely to be a leader supporting government spending has ignited a wave of enthusiastic buying lifting the Tokyo stock index to a 5% gain, adding more than 2300 points to finish at 48,085 points.

But the yen is trending in the other direction – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become Japan’s first female prime minister later this month, is a known fan of the former UK leader. However, while she holds conservative views in social matters, Takaichi adopts a different strategy on budget matters, and promotes a revival of government spending and easy money policies.

Therefore, markets predict to maintain Japan’s push to boost economic growth via government outlays and reduced borrowing costs, likely resulting in increased price pressures and more debt.

Thus the weaker yen, with traders expecting reduced rate increases in Tokyo than before.

Japanese long-term bond prices have also fallen in Monday trading, lifting the interest rate on long-term Japanese bonds near to record highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets will be calculating the degree to which the new leader’s plans will echo the Abenomics strategy pushed by former PM Shinzo Abe.

One analyst noted:

In contrast to last year, she has not engaged from highlighting the Abenomics program in the recent vote, but most know her core beliefs and her approval of Shinzo Abe’s Three Arrows strategy.

Investors might thus seek to obtain clarity on that position, plus the degree of influence she might become in shaping monetary policy, given the October BoJ meeting is considered a “live” affair and a rate rise seen as a real possibility...

Market Agenda

• 8:30 AM UK time: European construction data for September
• 9.30am BST: UK building sector data for September
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit 2025