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Financial Market Response to Japan's Ruling Party Vote

Currency strategists at major investment firms have reportedly exited their previous recommendations to hold a bullish stance regarding Japan’s currency following the country’s ruling party elected Takaichi as its chief.

In a note called “Getting out of the yen,” one lead strategist for currency analysis stated:

We went long JPY within our portfolio but have closed this following the weekend’s election result. The unexpected win by Takaichi brings back significant doubt regarding Japan’s policy priorities as well as the schedule for BoJ monetary tightening.

There is agreement that inflationary pressures exist within the Japanese economy, but questions are mounting regarding how it will be addressed.

The expert further cautioned evidence of political control across Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Closes In On the $4,000 Level

Bullion values are achieving unprecedented levels, again, in its strongest year in over four decades.

The immediate value of bullion has jumped by 1% or more today at $3,944 an ounce, as it closes in on the $4000/oz mark.

This means bullion prices has increased half again since January 1st, on track for its best annual gains since the late 1970s.

Bullion has advanced throughout the year because of various drivers, such as growing worries that public borrowing cannot be maintained.

The new leader’s victory in the Japanese election has further strengthened worries that leaders will attempt to boost output via increased debt and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Market Overview

Japan’s stock market has rallied to an all-time peak in Monday trading, while the yen is plunging, following the top position of the LDP was unexpectedly secured by stimulus supporter Takaichi.

Predictions that Sanae Takaichi will become a leader supporting government spending has sparked a rush of positive investment driving Japan’s benchmark index higher by five percent, as it gained over 2300 points ending at 48,085.

But the yen is very much moving in the other direction – it dropped nearly two percent relative to the USD at 150.3¥/$.

The incoming leader, set to be the first woman to lead Japan soon, has long admired of Margaret Thatcher. But although her social policies are right-leaning in social matters, the new leader takes an un-Thatcherite approach on budget matters, and promotes increased public expenditure and loose monetary policy.

Consequently, she’s expected to persist with the country’s drive to boost economic growth via government outlays and reduced borrowing costs, likely resulting in rising inflation and greater borrowing.

As a result the falling currency, with traders expecting less monetary tightening in Tokyo compared to earlier expectations.

Japanese long-term bond prices are also down today, pushing up the yield on its 30-year debt near to record highs, on expectations of increased debt issuance and sustained inflationary pressures.

Traders will be calculating the degree to which Takaichi’s plans will echo the policies of Shinzo Abe implemented by ex-prime minister Shinzo Abe.

A brokerage head explained:

Different from previous comments, Takaichi has refrained from talking up the Abenomics program in the recent vote, but experts understand her core beliefs and her appreciation of the former PM’s three-pillar philosophy.

Markets could then push to obtain clarity on that position, plus the degree of influence she might become in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a key event with a quarter-point increase potentially on the table...

Economic Calendar

• 8.30am BST: European construction data for the previous month
• 9.30am BST: UK building sector data for the last month
• 18:30 BST: Bank of England governor Andrew Bailey to deliver address at an investment conference 2025