🔗 Share this article

Financial Market Response following Japan's Political Shift

Foreign exchange experts from major banks have reportedly exited their previous strategies for holding an optimistic view regarding Japan’s currency after the country’s leading political group chose Sanae Takaichi as the new leader.

In commentary named “Leaving yen positions,” one lead strategist for foreign exchange explained:

We went long JPY within our portfolio but have now exited following the party leadership vote. The unexpected win by Takaichi brings back renewed unpredictability around Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The strategist further cautioned that signs of fiscal dominance across Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Approaches the $4,000 Mark

Bullion values are hitting fresh record highs, again, during its best performance since the late 1970s.

The spot price of the precious metal has surged more than 1 percent in recent trading to $3,944 per ounce, approaching the $4,000 per ounce level.

This means bullion prices has increased by 50% since the start of January, on track for its strongest yearly performance since the late 1970s.

Bullion has advanced this year due to multiple reasons, including increasing fears that government debts are unsustainable.

Sanae Takaichi’s victory in the Japanese election has further strengthened worries that government officials will attempt to boost output by borrowing more and cheaper credit, and use inflation to reduce the real value of new borrowings.

Financial Summary

Japan’s stock market has jumped to unprecedented levels today, while the yen is plunging, after the top position of the governing party went unexpectedly to by fiscal dove Takaichi.

Forecasts that the new leader will be a pro-stimulus prime minister has ignited a rush of positive investment lifting the Nikkei 225 share index up by 5%, adding over 2300 points ending at just over 48,000.

Yet the Japanese yen is trending in the other direction – it has fallen almost 2% versus the dollar at 150.3¥/$.

Sanae 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 adopts a different strategy on budget matters, and promotes increased public expenditure and easy money policies.

As such, markets predict to persist with the country’s drive to stimulate its economy though fiscal spending and lower interest rates, potentially causing rising inflation and more debt.

Thus yen depreciation, with traders expecting reduced rate increases from the Bank of Japan than before.

Japanese long-term bond prices have declined this session, driving higher the interest rate on long-term Japanese bonds near to peak levels, due to forecasts of higher borrowing and lasting price increases.

Investors are evaluating the degree to which the new leader’s plans will resemble the policies of Shinzo Abe implemented by former PM Shinzo Abe.

A market expert commented:

Unlike in late 2024, Takaichi has refrained from talking up the three-arrow strategy during the party election, but most know her underlying stance and her support of the former PM’s three-pillar strategy.

Traders may therefore move to gain understanding on that position, and how much impact she might become in forming the BoJ’s policy thinking, given the October BoJ meeting is considered a potential turning point and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Euro area building activity for September
• 9:30 AM UK time: British construction figures for the last month
• 18:30 BST: Central bank head Bailey to speak at a financial forum this year