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Financial Market Response following Japan's Political Shift

Foreign exchange experts at prominent banks have reportedly exited their positions for holding a bullish stance regarding the yen after the country’s leading political group chose Sanae Takaichi as the new head.

In a report titled “Leaving yen positions,” one lead strategist for foreign exchange explained:

Our strategy was bullish on the yen as part of our strategy but have closed this after the LDP election outcome. The unexpected win by Takaichi reintroduces significant doubt concerning Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but questions are mounting regarding how it will be addressed.

The expert also warned that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Closes In On $4,000 per ounce Mark

Bullion values are reaching unprecedented levels, again, in its top-performing period since the late 1970s.

The current price of gold has jumped more than 1 percent in recent trading at $3,944 an ounce, nearing the $4000/oz mark.

This indicates bullion prices has surged fifty percent since the start of January, likely to achieve its strongest yearly performance since the Iranian Revolution.

The metal has risen this year by several factors, including rising concerns that public borrowing cannot be maintained.

Sanae Takaichi’s victory in the party vote will only have reinforced worries that government officials could seek to boost output by borrowing more and cheaper credit, and depend on rising prices to diminish the worth of accumulated debt.

Trading Update

Tokyo’s bourse has jumped to an all-time peak today, while the yen is plunging, after the leadership of the LDP was unexpectedly secured by stimulus supporter Takaichi.

Expectations that Sanae Takaichi is likely to be a pro-stimulus prime minister has ignited a surge of optimistic trading that has pushed the Tokyo stock index to a 5% gain, adding over 2300 points to close at 48,085.

But the yen is trending downward – it has fallen about 2 percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan in the coming weeks, is a known fan of the former UK leader. However, while she is conservative in social matters, she adopts a different strategy in economic policy, and has advocate higher state investment and loose monetary policy.

Consequently, she’s expected to maintain Japan’s push to boost economic growth though fiscal spending and cheap credit, likely resulting in rising inflation and increased borrowing.

Thus the falling currency, as markets predict reduced rate increases in Tokyo compared to earlier expectations.

Japanese long-term bond prices have declined this session, pushing up the yield on thirty-year bonds approaching all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Investors will be calculating to what extent the new leader’s plans will mirror the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

One analyst commented:

Unlike in late 2024, Takaichi has refrained from promoting the three-arrow strategy in the recent vote, but most know her fundamental position and her approval of Shinzo Abe’s Three Arrows approach.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she might become in directing the central bank’s decisions, given the October BoJ meeting is viewed as a key event and a rate rise seen as a real possibility...

Market Agenda

• 8.30am BST: Euro area building activity for September
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at a financial forum 2025