🔗 Share this article

Market Reactions to the Japanese Ruling Party Vote

FX analysts from leading financial institutions have closed their recommendations for holding a bullish stance on the yen after the country’s governing party chose Sanae Takaichi as its leader.

In a report titled “Leaving yen positions,” a lead strategist of FX research stated:

Our strategy was bullish on the yen in our FX Blueprint but are now getting out after the LDP election outcome. The unexpected win by Takaichi reintroduces renewed unpredictability around Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist within the Japanese economy, but doubts are resurfacing on how it will be dealt with.

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

Gold Nears the $4,000/oz Threshold

Gold prices are achieving unprecedented levels, today, during its best performance since 1979.

The immediate value of gold has climbed more than 1 percent in recent trading reaching $3,944/oz, as it closes in on the $4,000 threshold.

This shows gold’s value has increased by 50% since the start of January, likely to achieve its top annual returns since the Iranian Revolution.

Bullion has advanced in recent months because of various drivers, including growing worries that public borrowing may be unmanageable.

The new leader’s victory in the party vote will only have reinforced apprehensions that leaders may try to boost output through higher borrowing and reduced rates, and rely on inflation to reduce the real value of the resulting debt.

Trading Update

Japan’s stock market has rallied to unprecedented levels this morning, as the yen falls, following the chief role of the country’s ruling party was surprisingly won by fiscal dove Takaichi.

Expectations that the new leader will become a pro-stimulus prime minister has ignited a wave of enthusiastic buying lifting the Nikkei 225 share index higher by five percent, as it gained over 2300 points to close at just over 48,000.

However, the currency is trending in the other direction – it dropped almost 2% relative to the USD to 150.3 yen per dollar.

The incoming leader, who should become Japan’s first female prime minister later this month, is a known fan of Thatcher. However, while she holds conservative views regarding social issues, she takes an un-Thatcherite approach on budget matters, and supports a revival of government spending and loose monetary policy.

Consequently, analysts anticipate to continue Japan’s push to stimulate its economy through public investment and cheap credit, potentially causing rising inflation and greater borrowing.

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

Japanese long-term bond prices have also fallen today, lifting the return on its 30-year debt approaching peak levels, due to forecasts of more government loans and more persistent inflation.

Traders are evaluating how closely Sanae Takaichi’s policies will echo the Abenomics strategy pushed by former PM Abe.

A market expert noted:

Different from previous comments, Takaichi has refrained from highlighting the three-arrow strategy in the recent vote, but experts understand her fundamental position and her approval of Shinzo Abe’s three-pillar strategy.

Investors might thus seek to gain understanding regarding her stance, plus the degree of influence she might become in directing the BoJ’s policy thinking, given the October BoJ meeting is viewed as a key event and a 25bp hike potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for last month
• 9:30 AM UK time: UK building sector data for September
• 18:30 BST: Central bank head the BOE’s Andrew Bailey to speak at an investment conference 2025