🔗 Share this article

Market Reactions to Japan's Ruling Party Vote

FX analysts from prominent banks have reportedly exited their previous recommendations to hold a long position on the yen after the country’s leading political group chose Takaichi as the new chief.

In a note named “Leaving yen positions,” one lead strategist for foreign exchange stated:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out due to the party leadership vote. Sanae Takaichi’s surprise victory creates renewed unpredictability concerning the nation’s policy focus and the timing of interest rate increases by the Bank of Japan.

There is agreement that inflationary pressures exist in Japan, but questions are mounting on how it will be dealt with.

The strategist further cautioned that signs of fiscal dominance within Japan (where the government controls the BoJ’s moves) represent a downside risk.

Gold Nears the $4,000/oz Mark

Gold prices are hitting unprecedented levels, again, during its best performance since the late 1970s.

The spot price of the precious metal has climbed more than 1 percent this morning to $3,944 per ounce, as it closes in on the $4000/oz mark.

This indicates the gold price has surged fifty percent from the beginning of the year, likely to achieve its strongest yearly performance since the Iranian Revolution.

The metal has risen throughout the year because of various drivers, such as growing worries that government debts cannot be maintained.

Takaichi’s success in Japan is likely amplifying apprehensions that leaders will attempt to stimulate the economy by borrowing more and cheaper credit, and rely on inflation to erode the value of new borrowings.

Market Overview

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

Forecasts that the new leader will be a PM favoring economic stimulus has sparked a wave of enthusiastic buying that has pushed Japan’s benchmark index to a 5% gain, rising by over 2300 points ending at just over 48,000.

However, the currency is trending downward – it has fallen almost 2% against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, set to be Japan’s first female prime minister later this month, is a known fan of Margaret Thatcher. But although her social policies are right-leaning in social matters, she takes an un-Thatcherite approach to fiscal policy, and supports increased public expenditure and accommodative central bank measures.

As such, she’s expected to persist with the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, which would lead to rising inflation and more debt.

Thus yen depreciation, as investors anticipate less monetary tightening from the Bank of Japan relative to previous forecasts.

The nation’s debt securities have also fallen in Monday trading, lifting the return on long-term Japanese bonds close to all-time highs, due to forecasts of increased debt issuance and sustained inflationary pressures.

Investors will be calculating the degree to which the new leader’s proposals will resemble the “Abenomics” programme advocated by previous leader Shinzo Abe.

A brokerage head noted:

Unlike in late 2024, the leader has avoided from talking up the Abenomics program during the party election, but most know her fundamental position and her support of the former PM’s three-pillar philosophy.

Investors might thus seek for more information on her policies, as well as exactly how influential she may be in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a potential turning point and a 25bp hike potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for September
• 9.30am BST: UK building sector data for the last month
• 6:30 PM UK time: Bank of England governor Bailey to give keynote speech at an investment conference this year