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Financial Market Response following Japan's Leadership Election

FX analysts at major financial institutions have reportedly exited their previous recommendations to hold an optimistic view regarding the yen after Japan’s ruling party chose Sanae Takaichi to be its leader.

In commentary called “Getting out of the yen,” one lead strategist for foreign exchange stated:

We held a long yen position as part of our strategy but are now getting out after the party leadership vote. Takaichi’s unforeseen success brings back too much uncertainty regarding the nation’s policy focus as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing on how it will be dealt with.

The strategist additionally noted indicators of government influence within Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Closes In On the $4,000 Level

The gold price are reaching unprecedented levels, again, in its strongest year in over four decades.

The immediate value of gold has climbed by 1% or more in recent trading at $3,944 an ounce, nearing the $4000/oz mark.

This indicates gold’s value has surged half again since January 1st, on track for its best annual gains since the Iranian Revolution.

Gold has been driven higher throughout the year due to multiple reasons, among them rising concerns that government debts cannot be maintained.

The new leader’s election win in Japan has further strengthened worries that government officials may try to boost output through higher borrowing and lower interest rates, and rely on inflation to erode the value of the resulting debt.

Market Overview

Tokyo’s bourse has jumped to unprecedented levels today, with the currency dropping, after the top position of the governing party was surprisingly won by spending advocate Sanae Takaichi.

Expectations that Takaichi is likely to be a PM favoring economic stimulus has sparked a wave of enthusiastic buying lifting Japan’s benchmark index up by 5%, rising by over 2300 points ending at 48,085 points.

However, the currency is heading in the other direction – it dropped nearly two percent versus the dollar reaching 150.3 against the greenback.

The incoming leader, set to be the first woman to lead Japan soon, is a long-time admirer of Margaret Thatcher. But although she is conservative in social matters, she adopts a different strategy to fiscal policy, and has advocate higher state investment and accommodative central bank measures.

As such, analysts anticipate to maintain the national effort to boost economic growth through public investment and cheap credit, potentially causing increased price pressures and more debt.

Thus the weaker yen, as markets predict fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

The nation’s debt securities have declined today, driving higher the interest rate on its 30-year debt close to peak levels, on expectations of more government loans and lasting price increases.

Traders will be calculating to what extent Sanae Takaichi’s plans will echo the Abenomics strategy implemented by previous leader Shinzo Abe.

A market expert commented:

Different from previous comments, the leader has avoided from talking up the three-arrow strategy in this LDP leadership campaign, but experts understand her fundamental position and her appreciation of Shinzo Abe’s Three Arrows philosophy.

Markets could then push to obtain clarity on her policies, and how much impact she might become in directing monetary policy, ahead of the BoJ’s next meeting is considered a potential turning point and a 25bp hike considered likely...

Economic Calendar

• 8.30am BST: European construction data for last month
• 9.30am BST: UK building sector data for the last month
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to give keynote speech at Scotland’s Global Investment Summit 2025