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Financial Market Response to Japan's Leadership Election

FX analysts from major banks have terminated their recommendations to hold a bullish stance on the Japanese yen following the country’s ruling party selected Sanae Takaichi as the new chief.

In a note named “Leaving yen positions,” a lead strategist for foreign exchange stated:

We went long JPY as part of our strategy but are now getting out after the party leadership vote. Sanae Takaichi’s surprise victory reintroduces significant doubt concerning Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflation is a problem for Japan, but doubts are resurfacing about the approach to managing it.

The strategist further cautioned indicators of government influence across Japan (where the government controls monetary policy decisions) pose a potential danger.

Gold Nears $4,000 per ounce Level

The gold price are hitting new all-time peaks, today, in its top-performing period in over four decades.

The current price of gold has surged more than 1 percent this morning to $3,944 per ounce, approaching the $4000/oz mark.

This indicates the gold price has surged by 50% since January 1st, heading for its best annual gains since the late 1970s.

The metal has risen in recent months because of various drivers, such as rising concerns that public borrowing may be unmanageable.

Takaichi’s victory in Japan has further strengthened concerns that leaders may try to stimulate the economy through higher borrowing and reduced rates, and use inflation to erode the value of accumulated debt.

Financial Summary

Japan’s stock market has surged to an all-time peak today, with the currency dropping, after the top position of the LDP went unexpectedly to by spending advocate Takaichi.

Forecasts that Sanae Takaichi is likely to be a leader supporting government spending has triggered a wave of enthusiastic buying driving the Tokyo stock index higher by five percent, as it gained 2315 points to close at just over 48,000.

Yet the Japanese yen is trending in the other direction – it’s down almost 2% against the US dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become Japan’s first female prime minister soon, has long admired of Thatcher. However, while she holds conservative views on social policy, she takes an un-Thatcherite approach on budget matters, and promotes higher state investment and easy money policies.

Therefore, she’s expected to continue Japan’s push to stimulate its economy via government outlays and lower interest rates, likely resulting in rising inflation and greater borrowing.

Thus the weaker yen, with traders expecting less monetary tightening in Tokyo compared to earlier expectations.

The nation’s debt securities are also down today, driving higher the interest rate on thirty-year bonds near to all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Traders will be calculating to what extent the new leader’s proposals will resemble the Abenomics strategy pushed by former PM Shinzo Abe.

A brokerage head commented:

Different from previous comments, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but experts understand her core beliefs and her approval of Shinzo Abe’s three-arrow approach.

Traders may therefore move to obtain clarity regarding her stance, plus the degree of influence she could be in forming the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a key event and a rate rise considered likely...

Economic Calendar

• 08:30 British Summer Time: European construction data for last month
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to deliver address at an investment conference 2025