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Investor Sentiment following Japan's Political Shift

Currency strategists at leading investment firms have closed their recommendations to hold a bullish stance regarding the Japanese yen after the country’s leading political group selected Sanae Takaichi to be its chief.

In a report called “Exiting the yen,” one chief for currency analysis stated:

We went long JPY in our FX Blueprint but have now exited due to the LDP election outcome. Takaichi’s unforeseen success reintroduces renewed unpredictability regarding Japanese economic goals and the expected date of interest rate increases by the Bank of Japan.

There is agreement that rising prices are an issue in Japan, but questions are mounting regarding how it will be addressed.

The expert also warned evidence of political control within Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Approaches the $4,000 Level

Bullion values are hitting fresh record highs, once more, during its best performance in over four decades.

The spot price of the precious metal has jumped by over 1% this morning reaching $3,944/oz, nearing the $4,000 per ounce level.

This shows the gold price has surged half again since the start of January, on track for its best annual gains since the late 1970s.

Gold has been driven higher this year because of various drivers, including growing worries that public borrowing may be unmanageable.

The new leader’s success in the party vote has further strengthened worries that leaders could seek to secure growth via increased debt and cheaper credit, and depend on rising prices to reduce the real value of accumulated debt.

Financial Summary

The Japanese equity market has rallied to unprecedented levels today, with the currency dropping, after the chief role of the governing party went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi will become a PM favoring economic stimulus has sparked a surge of optimistic trading that has pushed Japan’s benchmark index to a 5% gain, adding 2315 points to finish at just over 48,000.

But the yen is very much moving the opposite way – it has fallen nearly two percent relative to the USD at 150.3¥/$.

Sanae Takaichi, who is expected to become Japan’s first female prime minister soon, has long admired of Thatcher. But although her social policies are right-leaning on social policy, she follows a contrasting path on budget matters, and has advocate a revival of government spending and accommodative central bank measures.

Therefore, she’s expected to persist with the national effort to boost economic growth via government outlays and lower interest rates, which would lead to increased price pressures and greater borrowing.

Hence the weaker yen, as investors anticipate reduced rate increases from the Bank of Japan relative to previous forecasts.

The nation’s debt securities have declined today, pushing up the return on its 30-year debt approaching peak levels, because of predictions of higher borrowing and lasting price increases.

The markets are assessing how closely Sanae Takaichi’s proposals will echo the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

One analyst commented:

In contrast to last year, she has not engaged from talking up Abenomics in this LDP leadership campaign, but most know her underlying stance and her approval of the former PM’s three-pillar philosophy.

Markets could then push to gain understanding regarding her stance, as well as exactly how influential she might become in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: European construction data for September
• 9.30am BST: UK construction PMI for the last month
• 18:30 BST: BOE chief Bailey to give keynote speech at a financial forum 2025