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Market Reactions to Japan's Ruling Party Vote

FX analysts from leading investment firms have exited their recommendations to hold a bullish stance on Japan’s currency after Japan’s ruling party selected Sanae Takaichi as the new chief.

In a note named “Exiting the yen,” a lead strategist for currency analysis stated:

We held a long yen position as part of our strategy but have closed this after the party leadership vote. The unexpected win by Takaichi reintroduces renewed unpredictability regarding Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

There is agreement that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

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

Gold Nears $4,000 per ounce Threshold

Bullion values are achieving unprecedented levels, today, in its strongest year since the late 1970s.

The spot price of the precious metal has surged more than 1 percent this morning to $3,944 per ounce, approaching the $4,000 per ounce level.

This shows the gold price has jumped half again since the start of January, on track for its best annual gains since the Iranian Revolution.

Bullion has advanced this year by several factors, such as increasing fears that public borrowing may be unmanageable.

Takaichi’s victory in the party vote will only have reinforced apprehensions that government officials may try to stimulate the economy by borrowing more and cheaper credit, and depend on rising prices to diminish the worth of the resulting debt.

Financial Summary

Japan’s stock market has surged to an all-time peak today, while the yen is plunging, after the top position of the country’s ruling party was unexpectedly secured by spending advocate Takaichi.

Expectations that the new leader is likely to be a pro-stimulus prime minister has sparked a rush of positive investment that has pushed Japan’s benchmark index up by 5%, adding more than 2300 points to finish at 48,085.

Yet the Japanese yen is very much moving the opposite way – it’s down nearly two percent relative to the USD to 150.3 yen per dollar.

The incoming leader, who is expected to become the nation’s initial woman PM later this month, is a long-time admirer of Margaret Thatcher. However, while she is conservative regarding social issues, the new leader follows a contrasting path on budget matters, and supports a revival of government spending and accommodative central bank measures.

As such, she’s expected to maintain the country’s drive to boost economic growth though fiscal spending and lower interest rates, potentially causing rising inflation and increased borrowing.

Thus yen depreciation, as investors anticipate fewer interest rates hikes by Japanese authorities compared to earlier expectations.

Japan’s government bond values are also down this session, driving higher the yield on its 30-year debt approaching record highs, due to forecasts of higher borrowing and more persistent inflation.

The markets will be calculating to what extent Takaichi’s policies will mirror the Abenomics strategy pushed by ex-prime minister Abe.

A brokerage head commented:

Unlike in late 2024, she has not engaged from talking up Abenomics in the recent vote, but many are aware her underlying stance and her approval of Abe’s three-pillar approach.

Investors might thus seek to obtain clarity on that position, as well as exactly how influential she could be in forming the central bank’s decisions, with the Bank of Japan’s October session is considered a “live” affair and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: UK building sector data for the last month
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at a financial forum 2025