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Financial Market Response following Japan's Ruling Party Vote

FX analysts from prominent banks have terminated their previous positions for holding a long position on Japan’s currency following Japan’s ruling party elected Takaichi as the new head.

In a note named “Getting out of the yen,” a lead strategist for foreign exchange stated:

We held a long yen position as part of our strategy but are now getting out due to the party leadership vote. Takaichi’s unforeseen success creates renewed unpredictability around Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

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

The expert further cautioned that signs of fiscal dominance in Japan (where state authorities influence the central bank’s actions) are a tail risk.

Gold Approaches the $4,000/oz Level

Gold prices are achieving fresh record highs, once more, during its best performance in over four decades.

The spot price of bullion has surged more than 1 percent this morning reaching $3,944/oz, nearing the $4000/oz mark.

This means the gold price has surged fifty percent since January 1st, on track for its strongest yearly performance in over 45 years.

The metal has risen throughout the year by several factors, such as growing worries that public borrowing cannot be maintained.

The new leader’s election win in Japan will only have reinforced concerns that government officials may try to stimulate the economy via increased debt and cheaper credit, and use inflation to reduce the real value of new borrowings.

Financial Summary

Japan’s stock market has jumped to an all-time peak in Monday trading, while the yen is plunging, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that Takaichi will be a leader supporting government spending has sparked a wave of enthusiastic buying driving the Tokyo stock index up by 5%, as it gained over 2300 points to close at 48,085.

But the yen is heading the opposite way – it has fallen nearly two percent relative to the USD reaching 150.3 against the greenback.

Sanae Takaichi, who should become Japan’s first female prime minister in the coming weeks, is a long-time admirer of Margaret Thatcher. Yet even though she holds conservative views regarding social issues, the new leader takes an un-Thatcherite approach to fiscal policy, and supports increased public expenditure and accommodative central bank measures.

Therefore, analysts anticipate to persist with the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, likely resulting in rising inflation and more debt.

As a result yen depreciation, as investors anticipate less monetary tightening from the Bank of Japan than before.

Japanese long-term bond prices have declined in Monday trading, driving higher the yield on thirty-year bonds near to record highs, on expectations of increased debt issuance and lasting price increases.

The markets will be calculating how closely Takaichi’s proposals will resemble the “Abenomics” programme implemented by previous leader Shinzo Abe.

One analyst noted:

Unlike in late 2024, the leader has avoided from talking up the Abenomics program in the recent vote, but experts understand her fundamental position and her approval of Abe’s three-arrow strategy.

Investors might thus seek to gain understanding on her policies, as well as exactly how influential she might become in directing monetary policy, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike seen as a real possibility...

Market Agenda

• 8:30 AM UK time: European construction data for September
• 9.30am BST: British construction figures for September
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to deliver address at an investment conference this year