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Market Reactions following the Japanese Political Shift

Currency strategists from prominent investment firms have exited their strategies for holding a bullish stance on Japan’s currency following the country’s leading political group selected Takaichi as the new leader.

In commentary titled “Getting out of the yen,” one global head for foreign exchange explained:

We held a long yen position within our portfolio but have now exited after the party leadership vote. The unexpected win by Takaichi brings back renewed unpredictability concerning Japanese economic goals and the expected date of BoJ monetary tightening.

There is agreement that inflationary pressures exist within the Japanese economy, but uncertainty is now going up again regarding how it will be addressed.

The analyst additionally noted evidence of political control in Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000/oz Level

Bullion values are reaching unprecedented levels, once more, in its top-performing period since 1979.

The current price of bullion has climbed more than 1 percent in recent trading at $3,944 an ounce, as it closes in on the $4000/oz mark.

This shows bullion prices has surged fifty percent since the start of January, likely to achieve its strongest yearly performance since the Iranian Revolution.

Bullion has advanced in recent months by several factors, including growing worries that public borrowing may be unmanageable.

Sanae Takaichi’s election win in the party vote has further strengthened apprehensions that leaders may try to boost output via increased debt and cheaper credit, and use inflation to diminish the worth of new borrowings.

Market Overview

The Japanese equity market has jumped to unprecedented levels this morning, while the yen is plunging, following the leadership of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Predictions that the new leader will be a leader supporting government spending has ignited a rush of positive investment driving Japan’s benchmark index to a 5% gain, as it gained over 2300 points to close at 48,085.

However, the currency is heading the opposite way – it has fallen nearly two percent versus the dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become the first woman to lead Japan later this month, is a known fan of Margaret Thatcher. Yet even though she is conservative regarding social issues, Takaichi takes an un-Thatcherite approach to fiscal policy, and promotes a revival of government spending and loose monetary policy.

As such, markets predict to persist with Japan’s push to spur activity via government outlays and reduced borrowing costs, potentially causing increased price pressures and greater borrowing.

Thus yen depreciation, with traders expecting fewer interest rates hikes in Tokyo than before.

Japan’s government bond values have declined in Monday trading, lifting the yield on long-term Japanese bonds approaching record highs, on expectations of higher borrowing and sustained inflationary pressures.

Investors are evaluating the degree to which Sanae Takaichi’s policies will echo the “Abenomics” programme advocated by previous leader Abe.

A market expert explained:

Unlike in late 2024, the leader has avoided from talking up the three-arrow strategy in the recent vote, but experts understand her core beliefs and her appreciation of Abe’s three-pillar approach.

Markets could then push to obtain clarity on her policies, and how much impact she might become in forming the central bank’s decisions, with the Bank of Japan’s October session is considered a potential turning point with a quarter-point increase seen as a real possibility...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for the last month
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to give keynote speech at a financial forum this year