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Financial Market Response following the Japanese Ruling Party Vote

FX analysts at leading banks have reportedly terminated their strategies for holding a long position on the Japanese yen following the country’s leading political group elected Sanae Takaichi as its head.

In a report titled “Exiting the yen,” one chief of FX research stated:

We went long JPY as part of our strategy but have now exited due to the LDP election outcome. The unexpected win by Takaichi brings back too much uncertainty regarding Japanese economic goals as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue in Japan, but questions are mounting regarding how it will be addressed.

The analyst further cautioned that signs of fiscal dominance across Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Closes In On the $4,000 Mark

Bullion values are reaching unprecedented levels, again, during its best performance in over four decades.

The spot price of the precious metal has climbed by over 1% this morning at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This indicates gold’s value has surged fifty percent since January 1st, heading for its strongest yearly performance since the Iranian Revolution.

The metal has risen throughout the year by several factors, such as rising concerns that government debts cannot be maintained.

Takaichi’s victory in the Japanese election is likely amplifying concerns that government officials will attempt to secure growth via increased debt and reduced rates, and use inflation to erode the value of new borrowings.

Trading Update

Japan’s stock market has rallied to a record high this morning, while the yen is plunging, after the leadership of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Predictions that the new leader will be a pro-stimulus prime minister has sparked a rush of positive investment that has pushed the Nikkei 225 share index to a 5% gain, adding 2315 points ending at just over 48,000.

But the yen is trending the opposite way – it dropped about 2 percent against the US dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become the first woman to lead Japan later this month, is a long-time admirer of Margaret Thatcher. However, while she is conservative in social matters, Takaichi follows a contrasting path to fiscal policy, and promotes a revival of government spending and accommodative central bank measures.

Consequently, markets predict to persist with Japan’s push to stimulate its economy though fiscal spending and lower interest rates, which would lead to increased price pressures and greater borrowing.

Thus the weaker yen, with traders expecting fewer interest rates hikes in Tokyo relative to previous forecasts.

Japanese long-term bond prices are also down this session, driving higher the return on thirty-year bonds close to peak levels, due to forecasts of more government loans and lasting price increases.

The markets are evaluating to what extent the new leader’s plans will resemble the Abenomics strategy advocated by previous leader Abe.

One analyst noted:

Unlike in late 2024, Takaichi has refrained from promoting Abenomics in the recent vote, but most know her fundamental position and her appreciation of Abe’s three-arrow philosophy.

Traders may therefore move to gain understanding regarding her stance, plus the degree of influence she might become in shaping monetary policy, with the Bank of Japan’s October session is considered a “live” affair with a quarter-point increase considered likely...

Economic Calendar

• 8:30 AM UK time: European construction data for September
• 09:30 BST: UK building sector data for the last month
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to deliver address at an investment conference this year