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Market Reactions following the Japanese Political Shift

Currency strategists from major investment firms have closed their previous recommendations to hold an optimistic view regarding the yen after Japan’s governing party selected Sanae Takaichi as the new chief.

In a note called “Exiting the yen,” a chief for currency analysis stated:

We went long JPY within our portfolio but have closed this after the LDP election outcome. Takaichi’s unforeseen success brings back too much uncertainty around Japanese economic goals and the timing of interest rate increases by the Bank of Japan.

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

The strategist further cautioned indicators of government influence within Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Approaches the $4,000 Mark

The gold price are achieving new all-time peaks, again, during its best performance in over four decades.

The immediate value of gold has surged by over 1% this morning to $3,944 per ounce, as it closes in on the $4,000 threshold.

This means gold’s value has jumped fifty percent since the start of January, likely to achieve its best annual gains since the late 1970s.

The metal has risen throughout the year by several factors, including growing worries that public borrowing are unsustainable.

Takaichi’s election win in the Japanese election has further strengthened worries that politicians could seek to stimulate the economy through higher borrowing and reduced rates, and use inflation to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has rallied to an all-time peak today, while the yen is plunging, after the top position of the governing party was surprisingly won by fiscal dove Sanae Takaichi.

Predictions that Takaichi will be a leader supporting government spending has sparked a rush of positive investment lifting the Nikkei 225 share index to a 5% gain, rising by over 2300 points ending at just over 48,000.

But the yen is trending in the other direction – it’s down almost 2% versus the dollar reaching 150.3 against the greenback.

Takaichi, who should become the first woman to lead Japan soon, is a known fan of Margaret Thatcher. Yet even though her social policies are right-leaning in social matters, the new leader adopts a different strategy on budget matters, and has advocate a revival of government spending and loose monetary policy.

As such, markets predict to continue the national effort to stimulate its economy via government outlays and reduced borrowing costs, potentially causing rising inflation and more debt.

Thus the falling currency, as investors anticipate fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined today, driving higher the yield on thirty-year bonds near to record highs, because of predictions of more government loans and more persistent inflation.

Investors are evaluating the degree to which the new leader’s proposals will resemble the Abenomics strategy implemented by former PM Shinzo Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from promoting the Abenomics program during the party election, but experts understand her core beliefs and her appreciation of the former PM’s three-arrow approach.

Markets could then push to gain understanding on that position, and how much impact she could be in directing the central bank’s decisions, with the Bank of Japan’s October session is considered a key event and a rate rise potentially on the table...

Market Agenda

• 8.30am BST: Euro area building activity for last month
• 09:30 BST: UK building sector data for the last month
• 18:30 BST: Central bank head Bailey to deliver address at a financial forum 2025