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Market Reactions following Japan's Political Shift

FX analysts at major banks have reportedly closed their strategies for holding an optimistic view regarding Japan’s currency after Japan’s governing party elected Takaichi as its chief.

In a note called “Leaving yen positions,” one chief for foreign exchange explained:

Our strategy was bullish on the yen as part of our strategy but are now getting out due to the party leadership vote. Takaichi’s unforeseen success reintroduces renewed unpredictability concerning Japanese economic goals and the expected date of BoJ monetary tightening.

Experts agree that inflationary pressures exist in Japan, but questions are mounting about the approach to managing it.

The analyst also warned evidence of political control in Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Nears the $4,000 Mark

The gold price are hitting fresh record highs, once more, during its best performance since the late 1970s.

The current price of the precious metal has jumped more than 1 percent this morning reaching $3,944/oz, nearing the $4,000 threshold.

This shows gold’s value has jumped by 50% since January 1st, likely to achieve its best annual gains since the Iranian Revolution.

Bullion has advanced throughout the year by several factors, among them growing worries that national debt levels are unsustainable.

The new leader’s victory in the party vote will only have reinforced worries that government officials may try to boost output through higher borrowing and lower interest rates, and rely on inflation to reduce the real value of accumulated debt.

Market Overview

The Japanese equity market has surged to an all-time peak today, with the currency dropping, after the chief role of the LDP was surprisingly won by stimulus supporter Takaichi.

Forecasts that the new leader will become a PM favoring economic stimulus has ignited a surge of optimistic trading lifting Japan’s benchmark index higher by five percent, rising by over 2300 points to close at 48,085 points.

However, the currency is trending in the other direction – it has fallen nearly two percent versus the dollar to 150.3 yen per dollar.

The incoming leader, set to be Japan’s first female prime minister later this month, is a known fan of Margaret Thatcher. However, while her social policies are right-leaning in social matters, she follows a contrasting path in economic policy, and has advocate increased public expenditure and loose monetary policy.

As such, markets predict to continue the national effort to boost economic growth through public investment and lower interest rates, potentially causing increased price pressures and more debt.

Thus the weaker yen, as investors anticipate less monetary tightening from the Bank of Japan relative to previous forecasts.

Japan’s government bond values have declined in Monday trading, driving higher the interest rate on long-term Japanese bonds close to record highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets are assessing to what extent the new leader’s policies will echo the Abenomics strategy implemented by former PM Shinzo Abe.

A market expert explained:

Unlike in late 2024, the leader has avoided from talking up the Abenomics program in this LDP leadership campaign, but most know her core beliefs and her appreciation of Shinzo Abe’s three-arrow approach.

Traders may therefore move to obtain clarity regarding her stance, and how much impact she could be in directing monetary policy, given the October BoJ meeting is considered a potential turning point and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: BOE chief Bailey to give keynote speech at an investment conference this year