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Market Reactions following Japan's Ruling Party Vote

FX analysts at leading financial institutions have reportedly closed their positions to hold a bullish stance regarding the yen following the country’s leading political group elected Sanae Takaichi to be its head.

In commentary called “Getting out of the yen,” a chief of FX research commented:

We went long JPY within our portfolio but are now getting out due to the party leadership vote. Sanae Takaichi’s surprise victory creates significant doubt concerning the nation’s policy focus and the timing of interest rate increases by the Bank of Japan.

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

The strategist additionally noted evidence of political control across Japan (where state authorities influence monetary policy decisions) represent a downside risk.

Gold Approaches $4,000 per ounce Threshold

Gold prices are hitting fresh record highs, once more, in its top-performing period since 1979.

The current price of bullion has jumped more than 1 percent this morning reaching $3,944/oz, as it closes in on the $4000/oz mark.

This indicates gold’s value has surged half again from the beginning of the year, likely to achieve its top annual returns in over 45 years.

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

Sanae Takaichi’s election win in the party vote has further strengthened worries that government officials could seek to boost output via increased debt and lower interest rates, and rely on inflation to reduce the real value of accumulated debt.

Trading Update

Japan’s stock market has surged to unprecedented levels today, while the yen is plunging, after the top position of the LDP was unexpectedly secured by stimulus supporter Takaichi.

Expectations that the new leader will be a leader supporting government spending has ignited a surge of optimistic trading driving the Nikkei 225 share index higher by five percent, rising by over 2300 points to close at 48,085.

But the yen is trending downward – it dropped nearly two percent versus the dollar to 150.3 yen per dollar.

Sanae Takaichi, who should become the nation’s initial woman PM in the coming weeks, is a long-time admirer of Thatcher. But although she holds conservative views regarding social issues, Takaichi adopts a different strategy in economic policy, and supports a revival of government spending and loose monetary policy.

As such, analysts anticipate to persist with the national effort to stimulate its economy through public investment and lower interest rates, potentially causing increased price pressures and greater borrowing.

Hence yen depreciation, as investors anticipate fewer interest rates hikes in Tokyo compared to earlier expectations.

The nation’s debt securities have declined today, lifting the return on its 30-year debt near to record highs, due to forecasts of higher borrowing and lasting price increases.

Investors are assessing the degree to which Takaichi’s policies will resemble the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

A brokerage head noted:

Unlike in late 2024, the leader has avoided from promoting Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her appreciation of Shinzo Abe’s three-arrow approach.

Markets could then push for more information on that position, as well as exactly how influential she may be in forming the BoJ’s policy thinking, given the October BoJ meeting is viewed as a potential turning point and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for last month
• 09:30 BST: UK construction PMI for September
• 6.30pm BST: Central bank head Andrew Bailey to speak at an investment conference this year