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Market Reactions following Japan's Political Shift

FX analysts at major financial institutions have reportedly terminated their previous strategies for holding an optimistic view regarding the yen following the country’s governing party chose Takaichi as its chief.

In commentary named “Exiting the yen,” one lead strategist of FX research commented:

We went long JPY in our FX Blueprint but have closed this following the party leadership vote. Takaichi’s unforeseen success brings back significant doubt concerning Japanese economic goals as well as the schedule for BoJ monetary tightening.

There is agreement that inflation is a problem in Japan, but doubts are resurfacing on how it will be dealt with.

The analyst further cautioned indicators of government influence in Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Nears the $4,000/oz Level

The gold price are hitting fresh record highs, once more, in its strongest year since the late 1970s.

The current price of gold has climbed by 1% or more today to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This means gold’s value has increased fifty percent since the start of January, likely to achieve its top annual returns since the late 1970s.

Bullion has advanced in recent months because of various drivers, such as rising concerns that national debt levels may be unmanageable.

Sanae Takaichi’s victory in the party vote has further strengthened worries that government officials could seek to boost output through higher borrowing and reduced rates, and depend on rising prices to erode the value of accumulated debt.

Trading Update

Tokyo’s bourse has jumped to an all-time peak in Monday trading, while the yen is plunging, following the leadership of the governing party was unexpectedly secured by spending advocate Sanae Takaichi.

Expectations that Takaichi is likely to be a PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Nikkei 225 share index higher by five percent, as it gained more than 2300 points to finish at 48,085 points.

Yet the Japanese yen is heading the opposite way – it’s down almost 2% relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the nation’s initial woman PM later this month, has long admired of Thatcher. But although she is conservative in social matters, she adopts a different strategy to fiscal policy, and has advocate a revival of government spending and easy money policies.

Therefore, markets predict to persist with the country’s drive to spur activity via government outlays and reduced borrowing costs, likely resulting in rising inflation and more debt.

As a result yen depreciation, with traders expecting less monetary tightening in Tokyo relative to previous forecasts.

Japanese long-term bond prices are also down this session, driving higher the interest rate on its 30-year debt approaching record highs, on expectations of higher borrowing and sustained inflationary pressures.

Traders are assessing to what extent Sanae Takaichi’s policies will resemble the “Abenomics” programme pushed by former PM Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from promoting Abenomics during the party election, but many are aware her core beliefs and her support of Abe’s three-pillar philosophy.

Investors might thus seek for more information on her policies, and how much impact she may be in directing the central bank’s decisions, given the October BoJ meeting is considered a key event and a 25bp hike considered likely...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for September
• 9.30am BST: UK construction PMI for the last month
• 6:30 PM UK time: Bank of England governor Andrew Bailey to speak at an investment conference 2025