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Financial Market Response following Japan's Ruling Party Vote

Currency strategists at prominent banks have exited their strategies to hold a long position regarding Japan’s currency following Japan’s governing party chose Sanae Takaichi to be its head.

In commentary named “Leaving yen positions,” a lead strategist for currency analysis explained:

We held a long yen position in our FX Blueprint but have closed this after the party leadership vote. Takaichi’s unforeseen success reintroduces renewed unpredictability around the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

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

The expert further cautioned evidence of political control within Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Nears the $4,000/oz Mark

Bullion values are achieving unprecedented levels, again, in its top-performing period in over four decades.

The immediate value of gold has climbed by 1% or more in recent trading to $3,944 per ounce, nearing the $4000/oz mark.

This indicates the gold price has increased fifty percent from the beginning of the year, heading for its best annual gains since the late 1970s.

The metal has risen throughout the year because of various drivers, including rising concerns that public borrowing cannot be maintained.

The new leader’s election win in the party vote is likely amplifying concerns that politicians may try to secure growth through higher borrowing and cheaper credit, and use inflation to diminish the worth of the resulting debt.

Market Overview

Tokyo’s bourse has jumped to unprecedented levels in Monday trading, as the yen falls, after the chief role of the governing party was unexpectedly secured by fiscal dove Takaichi.

Predictions that Takaichi is likely to be a pro-stimulus prime minister has triggered a surge of optimistic trading driving Japan’s benchmark index higher by five percent, as it gained 2315 points to close at 48,085.

Yet the Japanese yen is very much moving downward – it dropped nearly two percent versus the dollar at 150.3¥/$.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, is a known fan of Margaret Thatcher. But although she holds conservative views on social policy, she takes an un-Thatcherite approach to fiscal policy, and has advocate increased public expenditure and loose monetary policy.

Consequently, she’s expected to maintain the national effort to spur activity through public investment and reduced borrowing costs, which would lead to higher inflation and greater borrowing.

As a result the weaker yen, as markets predict less monetary tightening from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have declined this session, driving higher the interest rate on long-term Japanese bonds approaching all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Investors are evaluating to what extent the new leader’s plans will mirror the Abenomics strategy advocated by ex-prime minister Shinzo Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from promoting the three-arrow strategy during the party election, but most know her underlying stance and her appreciation of Shinzo Abe’s three-arrow strategy.

Investors might thus seek for more information on that position, and how much impact she might become in forming the BoJ’s policy thinking, given the October BoJ meeting is considered a potential turning point and a rate rise considered likely...

Market Agenda

• 8.30am BST: Eurozone construction PMI for the previous month
• 9:30 AM UK time: British construction figures for September
• 6:30 PM UK time: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit this year