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Financial Market Response to the Japanese Leadership Election

Foreign exchange experts at leading financial institutions have terminated their previous positions for holding a bullish stance on Japan’s currency after Japan’s governing party selected Sanae Takaichi as the new leader.

In a report named “Getting out of the yen,” one lead strategist for foreign exchange commented:

We held a long yen position in our FX Blueprint but have now exited due to the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty regarding the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem in Japan, but questions are mounting regarding how it will be addressed.

The analyst also warned indicators of government influence across Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Nears $4,000 per ounce Level

Bullion values are hitting new all-time peaks, today, in its top-performing period in over four decades.

The current price of bullion has surged more than 1 percent this morning to $3,944 per ounce, approaching the $4,000 per ounce level.

This means bullion prices has jumped half again since January 1st, heading for its top annual returns since the late 1970s.

Gold has been driven higher this year due to multiple reasons, including increasing fears that public borrowing may be unmanageable.

The new leader’s victory in the party vote is likely amplifying concerns that politicians will attempt to stimulate the economy through higher borrowing and reduced rates, and use inflation to reduce the real value of new borrowings.

Financial Summary

Tokyo’s bourse has surged to unprecedented levels in Monday trading, with the currency dropping, after the chief role of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Expectations that Takaichi will be a pro-stimulus prime minister has sparked a wave of enthusiastic buying driving the Tokyo stock index higher by five percent, rising by over 2300 points ending at just over 48,000.

But the yen is trending the opposite way – it dropped almost 2% against the US dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan in the coming weeks, is a long-time admirer of Margaret Thatcher. Yet even though her social policies are right-leaning on social policy, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes higher state investment and easy money policies.

As such, she’s expected to persist with the national effort to stimulate its economy though fiscal spending and lower interest rates, which would lead to increased price pressures and greater borrowing.

As a result the falling currency, with traders expecting reduced rate increases in Tokyo relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, driving higher the yield on its 30-year debt approaching record highs, due to forecasts of higher borrowing and lasting price increases.

Traders are assessing to what extent Takaichi’s policies will echo the “Abenomics” programme implemented by previous leader Shinzo Abe.

One analyst commented:

Different from previous comments, she has not engaged from highlighting Abenomics during the party election, but many are aware her core beliefs and her support of Abe’s Three Arrows strategy.

Traders may therefore move to obtain clarity regarding her stance, and how much impact she may be in directing the central bank’s decisions, with the Bank of Japan’s October session is considered a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

• 8.30am BST: Eurozone construction PMI for the previous month
• 9:30 AM UK time: British construction figures for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit 2025