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Market Reactions following the Japanese Ruling Party Vote

Currency strategists at major banks have terminated their recommendations for holding a bullish stance on the Japanese yen following the country’s governing party chose Sanae Takaichi as its chief.

In a note called “Getting out of the yen,” one global head for currency analysis commented:

We went long JPY as part of our strategy but have closed this due to the weekend’s election result. The unexpected win by Takaichi creates significant doubt concerning Japan’s policy priorities and the timing of BoJ monetary tightening.

There is agreement that inflation is a problem for Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert additionally noted evidence of political control in Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Level

The gold price are reaching new all-time peaks, again, in its strongest year since the late 1970s.

The spot price of gold has climbed more than 1 percent in recent trading reaching $3,944/oz, nearing the $4,000 threshold.

This shows bullion prices has surged by 50% since January 1st, heading for its strongest yearly performance in over 45 years.

Gold has been driven higher in recent months due to multiple reasons, among them rising concerns that government debts may be unmanageable.

Takaichi’s election win in the party vote is likely amplifying concerns that politicians will attempt to secure growth via increased debt and reduced rates, and rely on inflation to reduce the real value of the resulting debt.

Market Overview

The Japanese equity market has surged to an all-time peak this morning, as the yen falls, 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 pro-stimulus prime minister has triggered a wave of enthusiastic buying that has pushed the Tokyo stock index to a 5% gain, as it gained over 2300 points ending at 48,085.

But the yen is very much moving in the other direction – it has fallen almost 2% relative to the USD to 150.3 yen per dollar.

Takaichi, who is expected to become the nation’s initial woman PM in the coming weeks, is a known fan of the former UK leader. Yet even though her social policies are right-leaning regarding social issues, the new leader takes an un-Thatcherite approach in economic policy, and supports a revival of government spending and easy money policies.

Therefore, analysts anticipate to persist with Japan’s push to spur activity through public investment and cheap credit, likely resulting in rising inflation and increased borrowing.

Hence the weaker yen, as markets predict reduced rate increases by Japanese authorities relative to previous forecasts.

Japan’s government bond values have declined today, driving higher the yield on thirty-year bonds near to all-time highs, due to forecasts of higher borrowing and more persistent inflation.

Traders are evaluating how closely Sanae Takaichi’s proposals will echo the “Abenomics” programme advocated by former PM Shinzo Abe.

A brokerage head explained:

Unlike in late 2024, she has not engaged from promoting the Abenomics program in this LDP leadership campaign, but most know her fundamental position and her approval of Abe’s three-pillar philosophy.

Markets could then push to obtain clarity on her policies, and how much impact she could be in forming the central bank’s decisions, with the Bank of Japan’s October session is seen as a key event and a 25bp hike seen as a real possibility...

Economic Calendar

• 8.30am BST: Euro area building activity for last month
• 09:30 BST: UK construction PMI for the last month
• 6.30pm BST: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit this year