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Market Reactions to the Japanese Political Shift

Foreign exchange experts at major banks have exited their previous strategies to hold a long position regarding the Japanese yen following the country’s ruling party chose Sanae Takaichi as the new head.

In a report titled “Getting out of the yen,” a lead strategist for foreign exchange explained:

We held a long yen position as part of our strategy but have now exited after the party leadership vote. The unexpected win by Takaichi reintroduces renewed unpredictability around Japan’s policy priorities and the expected date of BoJ monetary tightening.

Experts agree that inflation is a problem within the Japanese economy, but uncertainty is now going up again regarding how it will be addressed.

The analyst additionally noted indicators of government influence in Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000 Level

Bullion values are achieving new all-time peaks, today, in its top-performing period since the late 1970s.

The immediate value of bullion has surged by 1% or more in recent trading reaching $3,944/oz, nearing the $4000/oz mark.

This indicates the gold price has increased half again since the start of January, on track for its strongest yearly performance since the Iranian Revolution.

The metal has risen in recent months by several factors, such as increasing fears that government debts are unsustainable.

Sanae Takaichi’s election win in Japan is likely amplifying concerns that leaders could seek to boost output via increased debt and reduced rates, and depend on rising prices to reduce the real value of the resulting debt.

Trading Update

Japan’s stock market has surged to an all-time peak today, while the yen is plunging, after the leadership of the governing party went unexpectedly to by fiscal dove Takaichi.

Expectations that the new leader will become a PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Nikkei 225 share index up by 5%, as it gained more than 2300 points to finish at just over 48,000.

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

Takaichi, who is expected to become the first woman to lead Japan later this month, is a known fan of the former UK leader. Yet even though she is conservative in social matters, she takes an un-Thatcherite approach to fiscal policy, and has advocate increased public expenditure and easy money policies.

As such, analysts anticipate to maintain the national effort to spur activity though fiscal spending and lower interest rates, potentially causing higher inflation and greater borrowing.

Thus yen depreciation, as markets predict reduced rate increases from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen in Monday trading, driving higher the yield on thirty-year bonds near to record highs, because of predictions of increased debt issuance and more persistent inflation.

Traders will be calculating to what extent the new leader’s policies will echo the Abenomics strategy implemented by previous leader Abe.

A market expert explained:

In contrast to last year, the leader has avoided from promoting Abenomics during the party election, but most know her fundamental position and her approval of Abe’s Three Arrows philosophy.

Markets could then push for more information on her policies, as well as exactly how influential she could be in directing the central bank’s decisions, ahead of the BoJ’s next meeting is considered a potential turning point and a rate rise considered likely...

Today’s Schedule

• 8:30 AM UK time: European construction data for last month
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: BOE chief Andrew Bailey to give keynote speech at a financial forum 2025