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Financial Market Response following Japan's Ruling Party Vote

Foreign exchange experts from major banks have exited their previous recommendations to hold a bullish stance on the yen after the country’s leading political group selected Sanae Takaichi as the new head.

In commentary titled “Getting out of the yen,” a global head for foreign exchange explained:

We went long JPY as part of our strategy but have now exited due to the weekend’s election result. The unexpected win by Takaichi brings back renewed unpredictability regarding Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist within the Japanese economy, but questions are mounting about the approach to managing it.

The expert additionally noted that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Nears the $4,000/oz Mark

The gold price are achieving unprecedented levels, again, during its best performance since the late 1970s.

The spot price of the precious metal has jumped by 1% or more in recent trading reaching $3,944/oz, approaching the $4000/oz mark.

This means bullion prices has increased fifty percent from the beginning of the year, on track for its best annual gains in over 45 years.

The metal has risen this year due to multiple reasons, including rising concerns that national debt levels cannot be maintained.

Sanae Takaichi’s election win in Japan will only have reinforced concerns that government officials could seek to boost output via increased debt and reduced rates, and rely on inflation to erode the value of accumulated debt.

Financial Summary

The Japanese equity market has jumped to an all-time peak in Monday trading, as the yen falls, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that Sanae Takaichi will be a leader supporting government spending has ignited a wave of enthusiastic buying driving Japan’s benchmark index to a 5% gain, as it gained more than 2300 points ending at 48,085.

But the yen is trending downward – it’s down almost 2% relative to the USD at 150.3¥/$.

Sanae Takaichi, set to be Japan’s first female prime minister soon, is a long-time admirer of Thatcher. But although she holds conservative views on social policy, Takaichi follows a contrasting path to fiscal policy, and has advocate increased public expenditure and easy money policies.

Therefore, she’s expected to continue the country’s drive to stimulate its economy through public investment and lower interest rates, likely resulting in rising inflation and greater borrowing.

Hence yen depreciation, with traders expecting less monetary tightening in Tokyo relative to previous forecasts.

Japanese long-term bond prices have declined this session, pushing up the interest rate on thirty-year bonds close to all-time highs, on expectations of increased debt issuance and lasting price increases.

The markets are evaluating to what extent Sanae Takaichi’s plans will mirror the Abenomics strategy implemented by former PM Shinzo Abe.

A market expert noted:

Unlike in late 2024, she has not engaged from highlighting the three-arrow strategy during the party election, but experts understand her core beliefs and her appreciation of Shinzo Abe’s three-arrow strategy.

Investors might thus seek to gain understanding on that position, plus the degree of influence she could be in forming the central bank’s decisions, given the October BoJ meeting is seen as a “live” affair with a quarter-point increase considered likely...

Market Agenda

• 8:30 AM UK time: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit this year