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Market Reactions following the Japanese Ruling Party Vote

FX analysts at major banks have closed their strategies for holding an optimistic view regarding Japan’s currency after Japan’s ruling party chose Sanae Takaichi as its head.

In a report called “Leaving yen positions,” a chief for currency analysis stated:

We held a long yen position in our FX Blueprint but have now exited following the LDP election outcome. Sanae Takaichi’s surprise victory brings back renewed unpredictability regarding Japanese economic goals and the expected date of BoJ monetary tightening.

Experts agree that inflationary pressures exist for Japan, but uncertainty is now going up again about the approach to managing it.

The strategist also warned evidence of political control in Japan (in which politicians direct the BoJ’s moves) represent a downside risk.

Gold Nears the $4,000/oz Level

Bullion values are achieving unprecedented levels, once more, during its best performance since 1979.

The immediate value of bullion has surged more than 1 percent today at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This indicates gold’s value has increased half again from the beginning of the year, heading for its top annual returns since the late 1970s.

Bullion has advanced throughout the year because of various drivers, such as growing worries that government debts are unsustainable.

Sanae Takaichi’s victory in Japan has further strengthened worries that government officials may try to stimulate the economy through higher borrowing and reduced rates, and depend on rising prices to erode the value of new borrowings.

Market Overview

The Japanese equity market has surged to unprecedented levels this morning, with the currency dropping, following the leadership of the country’s ruling party was unexpectedly secured by stimulus supporter Sanae Takaichi.

Forecasts that Takaichi is likely to be a pro-stimulus prime minister has sparked a surge of optimistic trading that has pushed the Tokyo stock index up by 5%, as it gained over 2300 points to close at just over 48,000.

But the yen is very much moving in the other direction – it dropped almost 2% versus the dollar at 150.3¥/$.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, has long admired of Margaret Thatcher. However, while her social policies are right-leaning on social policy, the new leader adopts a different strategy on budget matters, and promotes increased public expenditure and easy money policies.

As such, she’s expected to maintain the national effort to stimulate its economy through public investment and cheap credit, potentially causing higher inflation and increased borrowing.

Thus the weaker yen, as markets predict less monetary tightening by Japanese authorities than before.

Japan’s government bond values have also fallen in Monday trading, pushing up the interest rate on long-term Japanese bonds near to record highs, due to forecasts of increased debt issuance and sustained inflationary pressures.

Investors are evaluating to what extent Sanae Takaichi’s policies will resemble the policies of Shinzo Abe advocated by former PM Shinzo Abe.

A brokerage head explained:

Different from previous comments, the leader has avoided from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her fundamental position and her appreciation of Abe’s three-arrow strategy.

Markets could then push to obtain clarity regarding her stance, plus the degree of influence she might become in forming the central bank’s decisions, given the October BoJ meeting is seen as a potential turning point with a quarter-point increase seen as a real possibility...

Today’s Schedule

• 08:30 British Summer Time: Eurozone construction PMI for September
• 09:30 BST: British construction figures for September
• 18:30 BST: BOE chief Andrew Bailey to give keynote speech at a financial forum 2025