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Financial Market Response to the Japanese Political Shift

FX analysts at prominent investment firms have reportedly terminated their strategies to hold a long position regarding the Japanese yen after the country’s governing party selected Sanae Takaichi as its chief.

In a note titled “Exiting the yen,” one global head of FX research explained:

We went long JPY in our FX Blueprint but have closed this due to the party leadership vote. Sanae Takaichi’s surprise victory creates renewed unpredictability around the nation’s policy focus as well as the schedule for BoJ monetary tightening.

Analysts concur that inflationary pressures exist for Japan, but questions are mounting regarding how it will be addressed.

The expert also warned evidence of political control within Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000/oz Mark

Bullion values are hitting new all-time peaks, today, during its best performance since the late 1970s.

The current price of gold has climbed by over 1% today reaching $3,944/oz, approaching the $4,000 threshold.

This means bullion prices has increased by 50% since the start of January, on track for its best annual gains since the late 1970s.

Gold has been driven higher throughout the year by several factors, such as rising concerns that public borrowing are unsustainable.

Sanae Takaichi’s election win in the Japanese election will only have reinforced apprehensions that politicians will attempt to boost output via increased debt and cheaper credit, and rely on inflation to erode the value of new borrowings.

Trading Update

The Japanese equity market has jumped to unprecedented levels this morning, as the yen falls, following the top position of the LDP was surprisingly won by stimulus supporter Sanae Takaichi.

Expectations that the new leader will become a leader supporting government spending has ignited a surge of optimistic trading that has pushed the Tokyo stock index to a 5% gain, as it gained over 2300 points to close at 48,085 points.

Yet the Japanese yen is very much moving in the other direction – it dropped almost 2% against the US dollar to 150.3 yen per dollar.

The incoming leader, who should become the nation’s initial woman PM later this month, has long admired of Margaret Thatcher. But although her social policies are right-leaning regarding social issues, she follows a contrasting path on budget matters, and has advocate a revival of government spending and easy money policies.

As such, she’s expected to persist with Japan’s push to stimulate its economy through public investment and reduced borrowing costs, likely resulting in increased price pressures and greater borrowing.

Thus yen depreciation, as markets predict less monetary tightening by Japanese authorities compared to earlier expectations.

The nation’s debt securities are also down this session, pushing up the interest rate on long-term Japanese bonds close to record highs, due to forecasts of increased debt issuance and lasting price increases.

The markets will be calculating the degree to which the new leader’s proposals will echo the policies of Shinzo Abe implemented by previous leader Shinzo Abe.

One analyst explained:

Unlike in late 2024, she has not engaged from highlighting the three-arrow strategy in the recent vote, but most know her underlying stance and her appreciation of Abe’s Three Arrows strategy.

Markets could then push for more information regarding her stance, plus the degree of influence she may be in directing the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a key event with a quarter-point increase seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: European construction data for September
• 9.30am BST: British construction figures for the last month
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to deliver address at a financial forum this year