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Market Reactions to Japan's Ruling Party Vote

Currency strategists from prominent financial institutions have reportedly terminated their positions for holding a bullish stance regarding the yen following Japan’s governing party selected Sanae Takaichi as the new chief.

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

Our strategy was bullish on the yen as part of our strategy but have now exited after the party leadership vote. Sanae Takaichi’s surprise victory reintroduces too much uncertainty regarding Japan’s policy priorities and the timing of BoJ monetary tightening.

There is agreement that rising prices are an issue within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The analyst also warned that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Mark

Bullion values are hitting unprecedented levels, today, in its top-performing period since the late 1970s.

The immediate value of the precious metal has surged by 1% or more in recent trading to $3,944 per ounce, approaching the $4,000 per ounce level.

This means the gold price has jumped half again from the beginning of the year, heading for its top annual returns since the late 1970s.

The metal has risen this year due to multiple reasons, among them increasing fears that public borrowing may be unmanageable.

Takaichi’s victory in Japan is likely amplifying concerns that government officials will attempt to boost output through higher borrowing and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Financial Summary

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

Expectations that the new leader is likely to be a leader supporting government spending has sparked a wave of enthusiastic buying driving the Tokyo stock index up by 5%, as it gained 2315 points ending at 48,085.

Yet the Japanese yen is heading the opposite way – it’s down nearly two percent relative to the USD at 150.3¥/$.

Takaichi, set to be Japan’s first female prime minister soon, is a known fan of the former UK leader. Yet even though she holds conservative views on social policy, Takaichi takes an un-Thatcherite approach to fiscal policy, and promotes increased public expenditure and accommodative central bank measures.

Consequently, markets predict to persist with Japan’s push to stimulate its economy via government outlays and lower interest rates, potentially causing rising inflation and more debt.

Thus the falling currency, as markets predict less monetary tightening by Japanese authorities relative to previous forecasts.

Japan’s government bond values are also down today, pushing up the interest rate on thirty-year bonds near to all-time highs, due to forecasts of increased debt issuance and more persistent inflation.

Investors are assessing to what extent Takaichi’s policies will resemble the policies of Shinzo Abe advocated by ex-prime minister Abe.

One analyst explained:

Unlike in late 2024, the leader has avoided from highlighting Abenomics during the party election, but many are aware her fundamental position and her approval of Shinzo Abe’s Three Arrows approach.

Traders may therefore move for more information on her policies, and how much impact she could be in forming monetary policy, given the October BoJ meeting is considered a “live” affair with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: Eurozone construction PMI for last month
• 9:30 AM UK time: British construction figures for the last month
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to deliver address at a financial forum 2025