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Investor Sentiment following Japan's Ruling Party Vote

Foreign exchange experts at leading financial institutions have terminated their previous recommendations to hold an optimistic view on Japan’s currency following Japan’s ruling party chose Takaichi as its head.

In a report called “Getting out of the yen,” a lead strategist for currency analysis commented:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out after the weekend’s election result. Takaichi’s unforeseen success reintroduces significant doubt regarding Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

Experts agree that inflationary pressures exist for Japan, but questions are mounting about the approach to managing it.

The expert also warned evidence of political control across Japan (where state authorities influence the BoJ’s moves) represent a downside risk.

Gold Closes In On the $4,000 Threshold

Gold prices are achieving unprecedented levels, again, in its strongest year since 1979.

The current price of the precious metal has jumped by over 1% this morning to $3,944 per ounce, nearing the $4,000 per ounce level.

This shows gold’s value has surged fifty percent since the start of January, on track for its strongest yearly performance since the late 1970s.

The metal has risen in recent months due to multiple reasons, among them growing worries that government debts may be unmanageable.

Takaichi’s election win in the Japanese election has further strengthened concerns that government officials will attempt to stimulate the economy via increased debt and reduced rates, and depend on rising prices to erode the value of the resulting debt.

Market Overview

Japan’s stock market has surged to unprecedented levels today, as the yen falls, following the leadership of the governing party was unexpectedly secured by fiscal dove Takaichi.

Expectations that the new leader is likely to be a leader supporting government spending has ignited a wave of enthusiastic buying that has pushed the Nikkei 225 share index up by 5%, adding over 2300 points to finish at 48,085.

But the yen is very much moving the opposite way – it’s down nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, set to be the first woman to lead Japan in the coming weeks, is a known fan of Thatcher. But although she is conservative regarding social issues, she follows a contrasting path to fiscal policy, and supports increased public expenditure and loose monetary policy.

Therefore, she’s expected to persist with the country’s drive to spur activity though fiscal spending and cheap credit, potentially causing rising inflation and increased borrowing.

Hence the weaker yen, as markets predict less monetary tightening in Tokyo than before.

The nation’s debt securities are also down this session, lifting the yield on thirty-year bonds approaching peak levels, on expectations of increased debt issuance and lasting price increases.

The markets are evaluating how closely Sanae Takaichi’s plans will mirror the policies of Shinzo Abe implemented by previous leader Abe.

One analyst explained:

Unlike in late 2024, Takaichi has refrained from promoting the Abenomics program during the party election, but experts understand her underlying stance and her support of the former PM’s Three Arrows strategy.

Markets could then push for more information regarding her stance, and how much impact she may be in forming monetary policy, given the October BoJ meeting is considered a potential turning point and a 25bp hike considered likely...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 09:30 BST: UK building sector data for the last month
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to give keynote speech at an investment conference this year