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Financial Market Response to Japan's Ruling Party Vote

FX analysts from leading investment firms have reportedly closed their previous recommendations to hold a bullish stance on the yen after the country’s leading political group selected Takaichi as its leader.

In a note named “Leaving yen positions,” one lead strategist of FX research commented:

We held a long yen position as part of our strategy but have now exited following the party leadership vote. Takaichi’s unforeseen success creates significant doubt regarding Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflation is a problem within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The analyst further cautioned evidence of political control within Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Approaches the $4,000/oz Level

Gold prices are hitting new all-time peaks, once more, in its top-performing period since the late 1970s.

The spot price of bullion has surged more than 1 percent today at $3,944 an ounce, nearing the $4,000 per ounce level.

This indicates gold’s value has surged fifty percent since January 1st, on track for its strongest yearly performance since the late 1970s.

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

The new leader’s success in Japan has further strengthened apprehensions that leaders will attempt to stimulate the economy by borrowing more and reduced rates, and use inflation to reduce the real value of new borrowings.

Trading Update

The Japanese equity market has surged to unprecedented levels this morning, with the currency dropping, after the chief role of the LDP was surprisingly won by spending advocate Sanae Takaichi.

Predictions that the new leader will be a leader supporting government spending has triggered a surge of optimistic trading lifting Japan’s benchmark index to a 5% gain, as it gained more than 2300 points ending at 48,085 points.

But the yen is heading the opposite way – it dropped nearly two percent against the US dollar to 150.3 yen per dollar.

The incoming leader, who should become the first woman to lead Japan soon, has long admired of the former UK leader. However, while she holds conservative views on social policy, she follows a contrasting path to fiscal policy, and has advocate higher state investment and easy money policies.

As such, she’s expected to continue the country’s drive to spur activity though fiscal spending and cheap credit, which would lead to higher inflation and increased borrowing.

Hence yen depreciation, as investors anticipate less monetary tightening in Tokyo compared to earlier expectations.

The nation’s debt securities have also fallen in Monday trading, driving higher the return on its 30-year debt near to all-time highs, on expectations of increased debt issuance and more persistent inflation.

Traders will be calculating the degree to which Takaichi’s plans will resemble the Abenomics strategy pushed by former PM Shinzo Abe.

A market expert noted:

Unlike in late 2024, Takaichi has refrained from promoting the three-arrow strategy during the party election, but many are aware her underlying stance and her appreciation of Shinzo Abe’s three-arrow approach.

Investors might thus seek to obtain clarity on her policies, and how much impact she might become in forming monetary policy, with the Bank of Japan’s October session is seen as a key event with a quarter-point increase potentially on the table...

Market Agenda

• 8.30am BST: European construction data for the previous month
• 9.30am BST: UK building sector data for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to deliver address at a financial forum 2025