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Financial Market Response to Japan's Ruling Party Vote

FX analysts at prominent banks have closed their strategies to hold a long position regarding the Japanese yen following the country’s ruling party elected Sanae Takaichi to be its head.

In commentary called “Exiting the yen,” a global head for currency analysis explained:

We held a long yen position within our portfolio but have now exited due to the party leadership vote. The unexpected win by Takaichi reintroduces renewed unpredictability around Japan’s policy priorities and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue in Japan, but doubts are resurfacing about the approach to managing it.

The analyst additionally noted indicators of government influence within Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Nears $4,000 per ounce Threshold

The gold price are hitting fresh record highs, once more, in its top-performing period since 1979.

The spot price of the precious metal has surged more than 1 percent this morning at $3,944 an ounce, nearing the $4,000 per ounce level.

This shows bullion prices has jumped by 50% since the start of January, on track for its top annual returns since the Iranian Revolution.

The metal has risen this year by several factors, such as increasing fears that government debts may be unmanageable.

The new leader’s election win in Japan has further strengthened concerns that leaders could seek to boost output through higher borrowing and cheaper credit, and depend on rising prices to erode the value of accumulated debt.

Trading Update

Japan’s stock market has rallied to an all-time peak in Monday trading, while the yen is plunging, after the top position of the country’s ruling party went unexpectedly to by stimulus supporter Takaichi.

Forecasts that the new leader will be a leader supporting government spending has sparked a surge of optimistic trading driving the Tokyo stock index to a 5% gain, as it gained 2315 points ending at 48,085 points.

Yet the Japanese yen is very much moving downward – it’s down about 2 percent versus the dollar at 150.3¥/$.

The incoming leader, who is expected to become Japan’s first female prime minister later this month, is a known fan of Thatcher. However, while her social policies are right-leaning regarding social issues, she adopts a different strategy to fiscal policy, and promotes higher state investment and accommodative central bank measures.

As such, markets predict to continue Japan’s push to spur activity though fiscal spending and lower interest rates, potentially causing increased price pressures and increased borrowing.

As a result the falling currency, as markets predict less monetary tightening by Japanese authorities than before.

Japanese long-term bond prices have declined in Monday trading, driving higher the yield on its 30-year debt approaching peak levels, on expectations of increased debt issuance and lasting price increases.

The markets will be calculating the degree to which Takaichi’s plans will mirror the “Abenomics” programme advocated by former PM Abe.

A market expert explained:

Unlike in late 2024, Takaichi has refrained from highlighting Abenomics in the recent vote, but many are aware her core beliefs and her support of Abe’s three-arrow approach.

Traders may therefore move to gain understanding on her policies, as well as exactly how influential she may be in forming the BoJ’s policy thinking, given the October BoJ meeting is seen as a “live” affair and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for the previous month
• 9:30 AM UK time: UK building sector data for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to speak at a financial forum this year