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Market Reactions following Japan's Ruling Party Vote

Currency strategists at prominent investment firms have terminated their strategies for holding a long position on the Japanese yen following Japan’s governing party elected Sanae Takaichi as the new leader.

In a report called “Getting out of the yen,” a chief for foreign exchange explained:

We held a long yen position within our portfolio but have closed this following the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces renewed unpredictability regarding the nation’s policy focus and the timing of BoJ monetary tightening.

Analysts concur that rising prices are an issue in Japan, but uncertainty is now going up again about the approach to managing it.

The strategist also warned that signs of fiscal dominance within Japan (where the government controls the central bank’s actions) are a tail risk.

Gold Nears the $4,000 Threshold

Gold prices are achieving new all-time peaks, once more, in its top-performing period in over four decades.

The current price of the precious metal has jumped more than 1 percent in recent trading reaching $3,944/oz, nearing the $4000/oz mark.

This shows gold’s value has increased fifty percent since the start of January, heading for its top annual returns since the Iranian Revolution.

Gold has been driven higher this year by several factors, among them growing worries that government debts may be unmanageable.

The new leader’s election win in the party vote has further strengthened concerns that leaders could seek to boost output by borrowing more and cheaper credit, and rely on inflation to reduce the real value of new borrowings.

Trading Update

Tokyo’s bourse has rallied to an all-time peak today, while the yen is plunging, following the chief role of the governing party went unexpectedly to by fiscal dove Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has ignited a surge of optimistic trading that has pushed the Nikkei 225 share index higher by five percent, as it gained more than 2300 points ending at just over 48,000.

However, the currency is heading in the other direction – it dropped about 2 percent against the US dollar to 150.3 yen per dollar.

Takaichi, who should become Japan’s first female prime minister in the coming weeks, is a long-time admirer of Margaret Thatcher. However, while her social policies are right-leaning on social policy, Takaichi takes an un-Thatcherite approach on budget matters, and promotes a revival of government spending and accommodative central bank measures.

As such, she’s expected to persist with the country’s drive to boost economic growth through public investment and cheap credit, likely resulting in rising inflation and greater borrowing.

Thus the falling currency, as markets predict fewer interest rates hikes by Japanese authorities compared to earlier expectations.

The nation’s debt securities have also fallen in Monday trading, pushing up the yield on its 30-year debt approaching all-time highs, due to forecasts of increased debt issuance and lasting price increases.

Investors will be calculating how closely the new leader’s policies will echo the policies of Shinzo Abe implemented by ex-prime minister Abe.

One analyst explained:

Unlike in late 2024, the leader has avoided from promoting Abenomics in the recent vote, but many are aware her fundamental position and her appreciation of Shinzo Abe’s Three Arrows strategy.

Traders may therefore move to gain understanding regarding her stance, and how much impact she might become in forming the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a potential turning point with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: European construction data for the previous month
• 9:30 AM UK time: UK construction PMI for September
• 6.30pm BST: BOE chief Bailey to deliver address at Scotland’s Global Investment Summit 2025