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Market Reactions to Japan's Leadership Election

Currency strategists from major investment firms have reportedly closed their previous recommendations for holding a bullish stance on Japan’s currency following Japan’s ruling party elected Sanae Takaichi as its head.

In a note named “Leaving yen positions,” a global head for foreign exchange stated:

We went long JPY within our portfolio but are now getting out after the LDP election outcome. The unexpected win by Takaichi creates too much uncertainty around Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but questions are mounting regarding how it will be addressed.

The analyst further cautioned that signs of fiscal dominance in Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Approaches the $4,000/oz Level

Bullion values are hitting fresh record highs, again, in its top-performing period since 1979.

The spot price of the precious metal has surged by 1% or more today at $3,944 an ounce, nearing the $4000/oz mark.

This shows gold’s value has jumped half again from the beginning of the year, on track for its top annual returns since the late 1970s.

Gold has been driven higher throughout the year because of various drivers, among them rising concerns that public borrowing are unsustainable.

The new leader’s election win in the Japanese election has further strengthened worries that leaders will attempt to stimulate the economy by borrowing more and cheaper credit, and depend on rising prices to diminish the worth of new borrowings.

Trading Update

Japan’s stock market has surged to unprecedented levels in Monday trading, while the yen is plunging, after the chief role of the LDP was surprisingly won by fiscal dove Takaichi.

Forecasts that Takaichi will be a leader supporting government spending has sparked a surge of optimistic trading that has pushed the Nikkei 225 share index to a 5% gain, adding more than 2300 points ending at 48,085 points.

Yet the Japanese yen is heading in the other direction – it dropped almost 2% versus the dollar to 150.3 yen per dollar.

The incoming leader, set to be Japan’s first female prime minister soon, is a known fan of the former UK leader. However, while she is conservative in social matters, the new leader takes an un-Thatcherite approach to fiscal policy, and supports a revival of government spending and easy money policies.

Consequently, markets predict to maintain the country’s drive to boost economic growth via government outlays and cheap credit, likely resulting in increased price pressures and greater borrowing.

Thus the weaker yen, as investors anticipate fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities are also down today, pushing up the yield on its 30-year debt approaching all-time highs, on expectations of higher borrowing and more persistent inflation.

Investors will be calculating the degree to which the new leader’s policies will resemble the policies of Shinzo Abe pushed by former PM Abe.

A market expert explained:

Different from previous comments, she has not engaged from talking up Abenomics in this LDP leadership campaign, but experts understand her fundamental position and her appreciation of the former PM’s three-arrow approach.

Investors might thus seek for more information on her policies, plus the degree of influence she may be in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike considered likely...

Economic Calendar

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: UK building sector data for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit 2025