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Market Reactions to Japan's Leadership Election

Foreign exchange experts at prominent banks have reportedly closed their previous positions for holding a bullish stance regarding the Japanese yen following the country’s ruling party chose Sanae Takaichi as the new chief.

In commentary called “Exiting the yen,” one global head of FX research explained:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out due to the party leadership vote. Takaichi’s unforeseen success creates significant doubt around Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflation is a problem within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

The strategist additionally noted indicators of government influence in Japan (where state authorities influence the central bank’s actions) represent a downside risk.

Gold Approaches the $4,000 Threshold

Bullion values are hitting fresh record highs, today, in its strongest year in over four decades.

The current price of bullion has jumped by 1% or more this morning at $3,944 an ounce, approaching the $4,000 per ounce level.

This shows the gold price has jumped by 50% since the start of January, likely to achieve its strongest yearly performance in over 45 years.

Gold has been driven higher this year because of various drivers, such as growing worries that public borrowing are unsustainable.

Sanae Takaichi’s success in the Japanese election has further strengthened apprehensions that government officials may try to boost output via increased debt and cheaper credit, and use inflation to erode the value of the resulting debt.

Financial Summary

Tokyo’s bourse has surged to an all-time peak today, with the currency dropping, following the leadership of the LDP went unexpectedly to by fiscal dove Takaichi.

Expectations that Sanae Takaichi will be a pro-stimulus prime minister has ignited a surge of optimistic trading that has pushed the Nikkei 225 share index to a 5% gain, rising by 2315 points to finish at just over 48,000.

But the yen is very much moving in the other direction – it has fallen almost 2% against the US dollar at 150.3¥/$.

The incoming leader, who is expected to become the nation’s initial woman PM in the coming weeks, is a long-time admirer of Thatcher. However, while she holds conservative views regarding social issues, she follows a contrasting path to fiscal policy, and supports increased public expenditure and accommodative central bank measures.

Therefore, analysts anticipate to maintain the national effort to spur activity through public investment and lower interest rates, likely resulting in higher inflation and greater borrowing.

As a result the weaker yen, as investors anticipate reduced rate increases from the Bank of Japan than before.

The nation’s debt securities have declined in Monday trading, pushing up the return on long-term Japanese bonds approaching record highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets will be calculating how closely the new leader’s plans will echo the Abenomics strategy implemented by ex-prime minister Shinzo Abe.

One analyst commented:

In contrast to last year, the leader has avoided from promoting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her support of Abe’s Three Arrows strategy.

Markets could then push for more information regarding her stance, as well as exactly how influential she may be in shaping monetary policy, given the October BoJ meeting is considered a “live” affair with a quarter-point increase potentially on the table...

Economic Calendar

• 8:30 AM UK time: European construction data for the previous month
• 9.30am BST: British construction figures for September
• 6:30 PM UK time: Bank of England governor Bailey to speak at an investment conference 2025