🔗 Share this article

Market Reactions to the Japanese Political Shift

Currency strategists at major investment firms have closed their previous positions to hold an optimistic view regarding Japan’s currency following the country’s leading political group selected Sanae Takaichi to be its head.

In a note named “Getting out of the yen,” one chief of FX research explained:

We went long JPY within our portfolio but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success reintroduces significant doubt concerning Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem for Japan, but questions are mounting about the approach to managing it.

The strategist further cautioned indicators of government influence across Japan (where state authorities influence the central bank’s actions) are a tail risk.

Gold Approaches $4,000 per ounce Mark

Gold prices are reaching fresh record highs, again, in its top-performing period in over four decades.

The current price of bullion has surged more than 1 percent today at $3,944 an ounce, as it closes in on the $4,000 threshold.

This shows the gold price has jumped by 50% from the beginning of the year, likely to achieve its top annual returns since the Iranian Revolution.

Gold has been driven higher throughout the year because of various drivers, including growing worries that national debt levels are unsustainable.

Sanae Takaichi’s success in the party vote has further strengthened worries that leaders will attempt to secure growth by borrowing more and lower interest rates, and use inflation to erode the value of accumulated debt.

Financial Summary

Japan’s stock market has rallied to unprecedented levels in Monday trading, with the currency dropping, after the chief role of the country’s ruling party went unexpectedly to by stimulus supporter Sanae Takaichi.

Forecasts that the new leader is likely to be a leader supporting government spending has triggered a surge of optimistic trading lifting the Tokyo stock index to a 5% gain, rising by 2315 points to finish at 48,085.

Yet the Japanese yen is very much moving the opposite way – it has fallen almost 2% relative to the USD reaching 150.3 against the greenback.

Takaichi, set to be the first woman to lead Japan in the coming weeks, has long admired of Margaret Thatcher. But although her social policies are right-leaning on social policy, Takaichi follows a contrasting path to fiscal policy, and has advocate increased public expenditure and accommodative central bank measures.

Therefore, she’s expected to continue Japan’s push to stimulate its economy via government outlays and reduced borrowing costs, which would lead to higher inflation and greater borrowing.

Thus the weaker yen, with traders expecting reduced rate increases in Tokyo compared to earlier expectations.

The nation’s debt securities have also fallen in Monday trading, lifting the return on its 30-year debt approaching peak levels, due to forecasts of higher borrowing and lasting price increases.

The markets are evaluating the degree to which Sanae Takaichi’s policies will resemble the policies of Shinzo Abe pushed by previous leader Abe.

One analyst explained:

Unlike in late 2024, she has not engaged from promoting Abenomics during the party election, but most know her underlying stance and her approval of Shinzo Abe’s three-pillar approach.

Investors might thus seek for more information regarding her stance, and how much impact she could be in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a key event with a quarter-point increase considered likely...

Market Agenda

• 8:30 AM UK time: European construction data for the previous month
• 9:30 AM UK time: UK building sector data for the last month
• 18:30 BST: Bank of England governor Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit 2025