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Market Reactions following Japan's Political Shift

Foreign exchange experts at prominent financial institutions have reportedly closed their recommendations for holding an optimistic view on the Japanese yen following the country’s leading political group elected Sanae Takaichi to be its chief.

In commentary titled “Leaving yen positions,” a global head for foreign exchange explained:

Our strategy was bullish on the yen within our portfolio but are now getting out due to the weekend’s election result. Sanae Takaichi’s surprise victory brings back renewed unpredictability around the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

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

The analyst further cautioned indicators of government influence in Japan (in which politicians direct the central bank’s actions) are a tail risk.

Gold Nears the $4,000 Level

The gold price are achieving new all-time peaks, once more, in its strongest year since the late 1970s.

The current price of gold has jumped more than 1 percent this morning at $3,944 an ounce, approaching the $4,000 per ounce level.

This indicates the gold price has increased half again since January 1st, likely to achieve its top annual returns in over 45 years.

Gold has been driven higher this year due to multiple reasons, such as rising concerns that national debt levels cannot be maintained.

Takaichi’s success in Japan will only have reinforced worries that leaders may try to boost output through higher borrowing and lower interest rates, and depend on rising prices to reduce the real value of new borrowings.

Market Overview

Tokyo’s bourse has surged to a record high this morning, with the currency dropping, following the top position of the country’s ruling party went unexpectedly to by stimulus supporter Takaichi.

Expectations that the new leader will be a pro-stimulus prime minister has ignited a rush of positive investment that has pushed the Tokyo stock index higher by five percent, adding more than 2300 points ending at 48,085 points.

But the yen is heading downward – it has fallen nearly two percent versus the dollar reaching 150.3 against the greenback.

Takaichi, set to be the nation’s initial woman PM soon, is a long-time admirer of Thatcher. Yet even though she is conservative in social matters, Takaichi adopts a different strategy in economic policy, and has advocate higher state investment and loose monetary policy.

Therefore, markets predict to maintain Japan’s push to boost economic growth though fiscal spending and cheap credit, likely resulting in rising inflation and increased borrowing.

As a result yen depreciation, as investors anticipate less monetary tightening from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have declined this session, pushing up the return on its 30-year debt approaching peak levels, because of predictions of increased debt issuance and more persistent inflation.

Traders are evaluating how closely Sanae Takaichi’s proposals will echo the Abenomics strategy advocated by previous leader Shinzo Abe.

One analyst commented:

Unlike in late 2024, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but most know her core beliefs and her approval of Shinzo Abe’s three-arrow approach.

Investors might thus seek to obtain clarity regarding her stance, plus the degree of influence she may be in directing the BoJ’s policy thinking, given the October BoJ meeting is considered a “live” affair and a rate rise potentially on the table...

Market Agenda

• 8:30 AM UK time: Euro area building activity for the previous month
• 9.30am BST: UK construction PMI for September
• 18:30 BST: Central bank head Andrew Bailey to deliver address at a financial forum this year