🔗 Share this article

Market Reactions following Japan's Leadership Election

Currency strategists at major financial institutions have reportedly closed their recommendations to hold a long position regarding Japan’s currency following the country’s ruling party elected Takaichi as the new chief.

In a note named “Exiting the yen,” a global head of FX research commented:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out due to the LDP election outcome. Sanae Takaichi’s surprise victory brings back too much uncertainty around the nation’s policy focus and the expected date of BoJ monetary tightening.

Experts agree 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 within Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Nears the $4,000 Threshold

Gold prices are achieving new all-time peaks, today, in its strongest year since 1979.

The current price of gold has surged more than 1 percent in recent trading at $3,944 an ounce, approaching the $4000/oz mark.

This means the gold price has jumped half again from the beginning of the year, on track for its best annual gains since the late 1970s.

Gold has been driven higher throughout the year because of various drivers, among them increasing fears that public borrowing may be unmanageable.

Sanae Takaichi’s victory in the Japanese election is likely amplifying apprehensions that leaders may try to secure growth through higher borrowing and cheaper credit, and depend on rising prices to erode the value of accumulated debt.

Market Overview

Japan’s stock market has rallied to an all-time peak today, as the yen falls, after the chief role of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a leader supporting government spending has sparked a rush of positive investment that has pushed the Nikkei 225 share index higher by five percent, as it gained more than 2300 points to finish at 48,085.

But the yen is very much moving the opposite way – it’s down nearly two percent relative to the USD reaching 150.3 against the greenback.

The incoming leader, who should become the first woman to lead Japan later this month, is a known fan of Margaret Thatcher. However, while she is conservative in social matters, the new leader takes an un-Thatcherite approach on budget matters, and has advocate higher state investment and easy money policies.

As such, markets predict to maintain the national effort to stimulate its economy though fiscal spending and cheap credit, potentially causing rising inflation and greater borrowing.

Hence the weaker yen, as investors anticipate less monetary tightening in Tokyo than before.

Japanese long-term bond prices are also down this session, driving higher the return on its 30-year debt close to record highs, on expectations of higher borrowing and sustained inflationary pressures.

Traders are evaluating how closely Takaichi’s plans will echo the Abenomics strategy advocated by previous leader Shinzo Abe.

One analyst noted:

In contrast to last year, Takaichi has refrained from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her support of Shinzo Abe’s three-pillar philosophy.

Markets could then push to obtain clarity on her policies, and how much impact she may be in forming the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a “live” affair and a 25bp hike considered likely...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor Bailey to speak at Scotland’s Global Investment Summit 2025