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Investor Sentiment to Japan's Political Shift

Currency strategists at major investment firms have closed their previous strategies for holding a bullish stance on Japan’s currency following the country’s governing party elected Sanae Takaichi as the new leader.

In a report titled “Exiting the yen,” a lead strategist for currency analysis stated:

Our strategy was bullish on the yen as part of our strategy but have closed this following the LDP election outcome. Sanae Takaichi’s surprise victory brings back renewed unpredictability around Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem for Japan, but questions are mounting regarding how it will be addressed.

The analyst additionally noted that signs of fiscal dominance across Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Nears the $4,000/oz Level

Gold prices are reaching fresh record highs, today, in its top-performing period since 1979.

The current price of gold has jumped more than 1 percent in recent trading reaching $3,944/oz, approaching the $4,000 threshold.

This means gold’s value has surged fifty percent from the beginning of the year, heading for its strongest yearly performance since the late 1970s.

Bullion has advanced in recent months because of various drivers, such as growing worries that public borrowing may be unmanageable.

Takaichi’s election win in the party vote will only have reinforced apprehensions that politicians could seek to boost output by borrowing more and reduced rates, and use inflation to diminish the worth of the resulting debt.

Trading Update

The Japanese equity market has rallied to a record high in Monday trading, as the yen falls, following the chief role of the LDP was unexpectedly secured by stimulus supporter Takaichi.

Forecasts that Sanae Takaichi will be a pro-stimulus prime minister has triggered a wave of enthusiastic buying lifting the Nikkei 225 share index to a 5% gain, as it gained over 2300 points ending at 48,085 points.

But the yen is very much moving the opposite way – it has fallen about 2 percent versus the dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan later this month, has long admired of Thatcher. Yet even though she is conservative in social matters, Takaichi takes an un-Thatcherite approach to fiscal policy, and supports increased public expenditure and easy money policies.

Consequently, she’s expected to maintain the national effort to spur activity via government outlays and reduced borrowing costs, which would lead to rising inflation and greater borrowing.

Hence the falling currency, as investors anticipate less monetary tightening from the Bank of Japan than before.

Japanese long-term bond prices have declined in Monday trading, driving higher the interest rate on its 30-year debt near to peak levels, due to forecasts of more government loans and lasting price increases.

Traders are assessing the degree to which Takaichi’s proposals will resemble the “Abenomics” programme advocated by ex-prime minister Abe.

A brokerage head commented:

In contrast to last year, she has not engaged from talking up Abenomics in the recent vote, but most know her underlying stance and her support of Shinzo Abe’s three-arrow strategy.

Markets could then push to obtain clarity on that position, and how much impact she might become in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is seen as a potential turning point and a rate rise considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for last month
• 9.30am BST: UK building sector data for September
• 18:30 BST: Bank of England governor Andrew Bailey to speak at an investment conference 2025