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Financial Market Response following Japan's Political Shift

FX analysts from prominent financial institutions have exited their previous positions to hold a bullish stance on the yen after Japan’s leading political group elected Takaichi to be its leader.

In commentary titled “Exiting the yen,” one chief for currency analysis explained:

We went long JPY in our FX Blueprint but have now exited following the LDP election outcome. Takaichi’s unforeseen success creates significant doubt 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 questions are mounting on how it will be dealt with.

The analyst also warned that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Mark

The gold price are reaching fresh record highs, again, during its best performance since the late 1970s.

The immediate value of the precious metal has jumped by over 1% today to $3,944 per ounce, approaching the $4000/oz mark.

This means gold’s value has surged by 50% since January 1st, on track for its best annual gains in over 45 years.

Gold has been driven higher throughout the year by several factors, such as increasing fears that government debts may be unmanageable.

The new leader’s election win in the party vote will only have reinforced worries that politicians will attempt to stimulate the economy via increased debt and cheaper credit, and rely on inflation to reduce the real value of the resulting debt.

Financial Summary

Japan’s stock market has surged to unprecedented levels in Monday trading, while the yen is plunging, following the leadership of the LDP was surprisingly won by spending advocate Takaichi.

Forecasts that the new leader will become a PM favoring economic stimulus has triggered a rush of positive investment lifting the Tokyo stock index to a 5% gain, adding more than 2300 points to finish at just over 48,000.

But the yen is heading the opposite way – it has fallen nearly two percent against the US dollar at 150.3¥/$.

Sanae Takaichi, who should become the first woman to lead Japan soon, has long admired of Thatcher. But although her social policies are right-leaning on social policy, Takaichi adopts a different strategy in economic policy, and promotes higher state investment and accommodative central bank measures.

As such, analysts anticipate to persist with Japan’s push to boost economic growth though fiscal spending and lower interest rates, potentially causing higher inflation and increased borrowing.

Hence the weaker yen, as investors anticipate fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities are also down in Monday trading, pushing up the return on thirty-year bonds approaching peak levels, because of predictions of higher borrowing and more persistent inflation.

Investors will be calculating the degree to which Takaichi’s policies will echo the Abenomics strategy implemented by previous leader Shinzo Abe.

A market expert explained:

Unlike in late 2024, the leader has avoided from promoting the three-arrow strategy in the recent vote, but many are aware her underlying stance and her appreciation of Abe’s three-pillar philosophy.

Markets could then push to gain understanding on her policies, and how much impact she might become in forming monetary policy, with the Bank of Japan’s October session is considered a potential turning point and a 25bp hike potentially on the table...

Economic Calendar

• 8.30am BST: Euro area building activity for the previous month
• 9.30am BST: UK construction PMI for the last month
• 6.30pm BST: Bank of England governor the BOE’s Andrew Bailey to speak at an investment conference this year