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Investor Sentiment following the Japanese Leadership Election

Currency strategists from leading banks have terminated their previous positions to hold an optimistic view regarding Japan’s currency following Japan’s leading political group chose Takaichi to be its chief.

In a note called “Exiting the yen,” a chief for foreign exchange stated:

Our strategy was bullish on the yen within our portfolio but have now exited following the party leadership vote. Sanae Takaichi’s surprise victory creates too much uncertainty regarding the nation’s policy focus as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem in Japan, but doubts are resurfacing regarding how it will be addressed.

The expert also warned that signs of fiscal dominance across Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Closes In On the $4,000/oz Threshold

Bullion values are reaching new all-time peaks, once more, in its strongest year since the late 1970s.

The current price of bullion has jumped by over 1% this morning at $3,944 an ounce, nearing the $4000/oz mark.

This means bullion prices has jumped by 50% since January 1st, on track for its best annual gains since the late 1970s.

Bullion has advanced throughout the year by several factors, such as rising concerns that government debts cannot be maintained.

The new leader’s election win in the Japanese election is likely amplifying worries that government officials could seek to stimulate the economy through higher borrowing and reduced rates, and depend on rising prices to reduce the real value of the resulting debt.

Trading Update

Japan’s stock market has surged to unprecedented levels in Monday trading, while the yen is plunging, following the top position of the country’s ruling party went unexpectedly to by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a leader supporting government spending has sparked a surge of optimistic trading that has pushed the Nikkei 225 share index higher by five percent, as it gained over 2300 points to close at 48,085 points.

However, the currency is heading in the other direction – it’s down nearly two percent against the US dollar at 150.3¥/$.

Takaichi, who is expected to become the nation’s initial woman PM later this month, is a long-time admirer of Thatcher. However, while she is conservative in social matters, she takes an un-Thatcherite approach in economic policy, and supports higher state investment and accommodative central bank measures.

As such, analysts anticipate to continue Japan’s push to spur activity via government outlays and lower interest rates, potentially causing higher inflation and increased borrowing.

Thus the weaker yen, with traders expecting fewer interest rates hikes by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices are also down today, driving higher the return on its 30-year debt near to record highs, because of predictions of increased debt issuance and lasting price increases.

The markets are assessing the degree to which Sanae Takaichi’s plans will resemble the “Abenomics” programme implemented by former PM Shinzo Abe.

One analyst explained:

Different from previous comments, the leader has avoided from talking up the Abenomics program in this LDP leadership campaign, but most know her core beliefs and her appreciation of Shinzo Abe’s three-pillar approach.

Traders may therefore move for more information on her policies, plus the degree of influence she could be in directing monetary policy, with the Bank of Japan’s October session is seen as a “live” affair and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for September
• 18:30 BST: BOE chief Bailey to give keynote speech at a financial forum 2025