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Financial Market Response to Japan's Leadership Election

Currency strategists at prominent financial institutions have terminated their recommendations to hold a bullish stance on the Japanese yen following the country’s governing party chose Sanae Takaichi to be its chief.

In commentary called “Getting out of the yen,” one lead strategist for foreign exchange explained:

We went long JPY in our FX Blueprint but have closed this due to the LDP election outcome. Sanae Takaichi’s surprise victory creates renewed unpredictability around the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist in Japan, but uncertainty is now going up again about the approach to managing it.

The expert also warned indicators of government influence within Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Nears $4,000 per ounce Threshold

Gold prices are hitting new all-time peaks, again, during its best performance in over four decades.

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

This shows the gold price has surged fifty percent from the beginning of the year, likely to achieve its strongest yearly performance in over 45 years.

Bullion has advanced this year because of various drivers, such as rising concerns that public borrowing are unsustainable.

The new leader’s victory in the Japanese election has further strengthened worries that government officials could seek to secure growth by borrowing more and cheaper credit, and rely on inflation to erode the value of new borrowings.

Financial Summary

Japan’s stock market has rallied to an all-time peak this morning, while the yen is plunging, after the chief role of the country’s ruling party was surprisingly won by stimulus supporter Sanae Takaichi.

Expectations that Takaichi is likely to be a pro-stimulus prime minister has ignited a rush of positive investment driving the Nikkei 225 share index higher by five percent, rising by more than 2300 points ending at 48,085 points.

But the yen is very much moving the opposite way – it’s down about 2 percent against the US dollar reaching 150.3 against the greenback.

Takaichi, set to be the first woman to lead Japan soon, is a long-time admirer of Thatcher. However, while she is conservative in social matters, she takes an un-Thatcherite approach in economic policy, and supports higher state investment and loose monetary policy.

Consequently, she’s expected to maintain the national effort to spur activity through public investment and reduced borrowing costs, potentially causing rising inflation and increased borrowing.

Hence the weaker yen, as markets predict fewer interest rates hikes in Tokyo relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, pushing up the return on long-term Japanese bonds approaching peak levels, due to forecasts of increased debt issuance and sustained inflationary pressures.

Investors are evaluating to what extent the new leader’s proposals will echo the “Abenomics” programme advocated by ex-prime minister Abe.

One analyst noted:

Different from previous comments, the leader has avoided from highlighting the three-arrow strategy in the recent vote, but most know her underlying stance and her support of Shinzo Abe’s three-pillar philosophy.

Traders may therefore move for more information on that position, plus the degree of influence she might become in forming the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a potential turning point with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: European construction data for the previous month
• 9:30 AM UK time: UK construction PMI for the last month
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to deliver address at an investment conference 2025