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Investor Sentiment following Japan's Political Shift

Foreign exchange experts from major banks have reportedly terminated their previous positions to hold a long position on Japan’s currency following the country’s governing party elected Sanae Takaichi to be its leader.

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

We went long JPY as part of our strategy but have now exited due to the party leadership vote. The unexpected win by Takaichi brings back renewed unpredictability concerning Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

Experts agree that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist additionally noted that signs of fiscal dominance in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches the $4,000/oz Threshold

Bullion values are reaching new all-time peaks, today, in its strongest year since 1979.

The spot price of the precious metal has surged more than 1 percent in recent trading at $3,944 an ounce, approaching the $4000/oz mark.

This means bullion prices has increased by 50% since January 1st, on track for its strongest yearly performance in over 45 years.

Gold has been driven higher in recent months due to multiple reasons, among them growing worries that government debts are unsustainable.

Sanae Takaichi’s success in the party vote has further strengthened worries that leaders may try to stimulate the economy via increased debt and reduced rates, and rely on inflation to diminish the worth of the resulting debt.

Market Overview

Japan’s stock market has surged to an all-time peak today, with the currency dropping, after the top position of the LDP was surprisingly won by spending advocate Sanae Takaichi.

Forecasts that Takaichi will become a PM favoring economic stimulus has triggered a wave of enthusiastic buying driving Japan’s benchmark index up by 5%, as it gained more than 2300 points ending at 48,085.

Yet the Japanese yen is very much moving in the other direction – it’s down almost 2% relative to the USD at 150.3¥/$.

The incoming leader, who is expected to become the first woman to lead Japan in the coming weeks, has long admired of Thatcher. Yet even though her social policies are right-leaning on social policy, Takaichi adopts a different strategy to fiscal policy, and supports a revival of government spending and easy money policies.

Therefore, analysts anticipate to persist with the country’s drive to stimulate its economy though fiscal spending and lower interest rates, which would lead to higher inflation and more debt.

As a result the weaker yen, as markets predict reduced rate increases from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices are also down this session, lifting the interest rate on its 30-year debt close to record highs, due to forecasts of higher borrowing and sustained inflationary pressures.

Traders will be calculating how closely Sanae Takaichi’s plans will mirror the Abenomics strategy advocated by previous leader Shinzo Abe.

A market expert explained:

Different from previous comments, the leader has avoided from promoting Abenomics during the party election, but experts understand her underlying stance and her approval of Abe’s three-pillar philosophy.

Markets could then push to obtain clarity on her policies, as well as exactly how influential she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a “live” affair and a 25bp hike seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for last month
• 09:30 BST: UK building sector data for the last month
• 6:30 PM UK time: BOE chief Bailey to deliver address at an investment conference 2025