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Financial Market Response following Japan's Political Shift

FX analysts at major financial institutions have reportedly closed their strategies for holding a bullish stance regarding Japan’s currency following Japan’s leading political group selected Takaichi as the new chief.

In a note called “Leaving yen positions,” one global head for currency analysis explained:

We went long JPY within our portfolio but have closed this after the party leadership vote. Sanae Takaichi’s surprise victory brings back significant doubt regarding the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue for Japan, but uncertainty is now going up again on how it will be dealt with.

The strategist also warned indicators of government influence across Japan (where state authorities influence the central bank’s actions) pose a potential danger.

Gold Nears $4,000 per ounce Mark

The gold price are reaching unprecedented levels, today, during its best performance since 1979.

The current price of bullion has climbed by over 1% today at $3,944 an ounce, as it closes in on the $4,000 threshold.

This shows the gold price has surged half again from the beginning of the year, heading for its best annual gains in over 45 years.

Bullion has advanced throughout the year due to multiple reasons, such as increasing fears that national debt levels may be unmanageable.

Sanae Takaichi’s election win in the Japanese election will only have reinforced concerns that government officials will attempt to stimulate the economy by borrowing more and reduced rates, and rely on inflation to erode the value of new borrowings.

Market Overview

Tokyo’s bourse has rallied to unprecedented levels today, as the yen falls, after the leadership of the country’s ruling party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that the new leader is likely to be a PM favoring economic stimulus has sparked a wave of enthusiastic buying lifting the Nikkei 225 share index higher by five percent, as it gained over 2300 points to close at 48,085 points.

Yet the Japanese yen is heading downward – it has fallen nearly two percent relative to the USD to 150.3 yen per dollar.

Takaichi, set to be Japan’s first female prime minister soon, has long admired of Thatcher. However, while she holds conservative views in social matters, the new leader takes an un-Thatcherite approach in economic policy, and promotes a revival of government spending and easy money policies.

Therefore, she’s expected to persist with the country’s drive to stimulate its economy via government outlays and reduced borrowing costs, potentially causing increased price pressures and more debt.

Thus the falling currency, with traders expecting reduced rate increases from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices are also down this session, pushing up the interest rate on thirty-year bonds approaching all-time highs, due to forecasts of increased debt issuance and lasting price increases.

Traders are evaluating how closely Takaichi’s proposals will echo the policies of Shinzo Abe implemented by former PM Abe.

A market expert noted:

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

Traders may therefore move for more information on her policies, and how much impact she could be in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a “live” affair and a 25bp hike considered likely...

Market Agenda

• 8.30am BST: Euro area building activity for the previous month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Central bank head Andrew Bailey to deliver address at an investment conference 2025