🔗 Share this article

Market Reactions to Japan's Political Shift

FX analysts from major financial institutions have reportedly exited their positions to hold an optimistic view on Japan’s currency after Japan’s ruling party elected Sanae Takaichi as its chief.

In a note named “Exiting the yen,” one global head for currency analysis commented:

Our strategy was bullish on the yen as part of our strategy but have now exited after the LDP election outcome. Takaichi’s unforeseen success creates renewed unpredictability concerning Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

There is agreement that inflation is a problem in Japan, but questions are mounting about the approach to managing it.

The analyst also warned indicators of government influence in Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Closes In On the $4,000/oz Threshold

Gold prices are achieving fresh record highs, again, in its top-performing period in over four decades.

The spot price of bullion has surged by 1% or more today at $3,944 an ounce, as it closes in on the $4000/oz mark.

This means the gold price has surged half again from the beginning of the year, likely to achieve its best annual gains since the late 1970s.

Gold has been driven higher this year due to multiple reasons, among them rising concerns that government debts are unsustainable.

Sanae Takaichi’s victory in Japan is likely amplifying apprehensions that politicians may try to boost output via increased debt and cheaper credit, and use inflation to reduce the real value of the resulting debt.

Financial Summary

Japan’s stock market has rallied to an all-time peak in Monday trading, as the yen falls, following the top position of the LDP was surprisingly won by spending advocate Takaichi.

Expectations that the new leader will be a pro-stimulus prime minister has ignited a wave of enthusiastic buying lifting the Nikkei 225 share index to a 5% gain, adding more than 2300 points to finish at 48,085.

Yet the Japanese yen is heading the opposite way – it dropped about 2 percent versus the dollar reaching 150.3 against the greenback.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. Yet even though she holds conservative views regarding social issues, she follows a contrasting path on budget matters, and supports higher state investment and easy money policies.

As such, markets predict to maintain the national effort to spur activity via government outlays and cheap credit, which would lead to rising inflation and more debt.

Thus yen depreciation, as markets predict less monetary tightening from the Bank of Japan relative to previous forecasts.

Japan’s government bond values have declined today, pushing up the interest rate on its 30-year debt close to peak levels, due to forecasts of higher borrowing and lasting price increases.

Investors are evaluating to what extent the new leader’s policies will mirror the policies of Shinzo Abe pushed by former PM Abe.

A market expert commented:

Different from previous comments, Takaichi has refrained from highlighting Abenomics in the recent vote, but many are aware her fundamental position and her support of the former PM’s three-arrow strategy.

Markets could then push to gain understanding on that position, and how much impact she might become in forming the central bank’s decisions, ahead of the BoJ’s next meeting is considered a key event with a quarter-point increase considered likely...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for the last month
• 18:30 BST: BOE chief Bailey to give keynote speech at a financial forum 2025