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Financial Market Response to Japan's Political Shift

Foreign exchange experts at prominent investment firms have reportedly exited their previous strategies to hold an optimistic view regarding the yen following Japan’s governing party chose Sanae Takaichi to be its head.

In a note called “Getting out of the yen,” one global head for foreign exchange commented:

We went long JPY in our FX Blueprint but are now getting out following the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability around Japan’s policy priorities and the expected date of BoJ monetary tightening.

Analysts concur that inflationary pressures exist within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The analyst further cautioned that signs of fiscal dominance in Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Nears the $4,000 Threshold

The gold price are hitting fresh record highs, today, in its top-performing period since 1979.

The immediate value of gold has climbed more than 1 percent today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This indicates bullion prices has jumped by 50% since the start of January, likely to achieve its top annual returns since the late 1970s.

Bullion has advanced in recent months because of various drivers, including growing worries that national debt levels may be unmanageable.

Sanae Takaichi’s success in Japan is likely amplifying apprehensions that politicians could seek to stimulate the economy through higher borrowing and lower interest rates, and use inflation to diminish the worth of accumulated debt.

Financial Summary

Japan’s stock market has rallied to unprecedented levels today, with the currency dropping, following the leadership of the LDP was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that Sanae Takaichi will be a PM favoring economic stimulus has triggered a surge of optimistic trading lifting Japan’s benchmark index higher by five percent, as it gained 2315 points to finish at 48,085 points.

Yet the Japanese yen is trending downward – it has fallen about 2 percent against the US dollar reaching 150.3 against the greenback.

Sanae Takaichi, who is expected to become Japan’s first female prime minister in the coming weeks, is a long-time admirer of Margaret Thatcher. But although she is conservative on social policy, she adopts a different strategy in economic policy, and promotes a revival of government spending and easy money policies.

Consequently, she’s expected to persist with the national effort to spur activity through public investment and cheap credit, which would lead to higher inflation and greater borrowing.

Hence the weaker yen, as markets predict less monetary tightening by Japanese authorities than before.

Japan’s government bond values have also fallen this session, lifting the yield on its 30-year debt close to all-time highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets will be calculating the degree to which the new leader’s policies will resemble the “Abenomics” programme advocated by former PM Abe.

One analyst commented:

Different from previous comments, Takaichi has refrained from highlighting the three-arrow strategy in the recent vote, but most know her core beliefs and her support of Abe’s three-pillar philosophy.

Investors might thus seek to obtain clarity on her policies, and how much impact she may be in forming monetary policy, ahead of the BoJ’s next meeting is considered a potential turning point and a rate rise seen as a real possibility...

Today’s Schedule

• 8.30am BST: Eurozone construction PMI for September
• 9.30am BST: British construction figures for the last month
• 6:30 PM UK time: Central bank head Bailey to speak at Scotland’s Global Investment Summit 2025