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Market Reactions following Japan's Political Shift

Currency strategists at leading financial institutions have reportedly exited their previous strategies for holding a bullish stance regarding Japan’s currency after the country’s ruling party elected Sanae Takaichi as the new chief.

In commentary titled “Getting out of the yen,” one chief for currency analysis explained:

Our strategy was bullish on the yen within our portfolio but are now getting out due to the party leadership vote. Takaichi’s unforeseen success reintroduces too much uncertainty around Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing regarding how it will be addressed.

The analyst also warned indicators of government influence within Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Closes In On the $4,000 Level

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

The spot price of bullion has surged by 1% or more this morning reaching $3,944/oz, nearing the $4,000 threshold.

This shows the gold price has jumped half again from the beginning of the year, on track for its strongest yearly performance since the late 1970s.

Bullion has advanced throughout the year due to multiple reasons, such as growing worries that national debt levels are unsustainable.

The new leader’s victory in Japan will only have reinforced concerns that politicians will attempt to stimulate the economy through higher borrowing and cheaper credit, and use inflation to erode the value of accumulated debt.

Market Overview

Japan’s stock market has rallied to unprecedented levels in Monday trading, while the yen is plunging, after the top position of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Predictions that the new leader will become a pro-stimulus prime minister has ignited a rush of positive investment that has pushed Japan’s benchmark index higher by five percent, as it gained over 2300 points ending at 48,085.

Yet the Japanese yen is very much moving downward – it dropped nearly two percent against the US dollar to 150.3 yen per dollar.

The incoming leader, who should become the nation’s initial woman PM later this month, has long admired of Margaret Thatcher. But although her social policies are right-leaning on social policy, the new leader adopts a different strategy to fiscal policy, and has advocate a revival of government spending and easy money policies.

As such, she’s expected to continue the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, likely resulting in higher inflation and greater borrowing.

As a result yen depreciation, as markets predict reduced rate increases by Japanese authorities than before.

Japanese long-term bond prices have also fallen today, pushing up the return on long-term Japanese bonds approaching peak levels, on expectations of more government loans and sustained inflationary pressures.

The markets are evaluating the degree to which the new leader’s proposals will resemble the “Abenomics” programme pushed by ex-prime minister Shinzo Abe.

A market expert explained:

Unlike in late 2024, she has not engaged from talking up Abenomics during the party election, but experts understand her core beliefs and her support of Shinzo Abe’s three-pillar approach.

Investors might thus seek to obtain clarity on that position, and how much impact she may be in forming the BoJ’s policy thinking, given the October BoJ meeting is seen as a key event and a 25bp hike considered likely...

Economic Calendar

• 08:30 British Summer Time: Euro area building activity for last month
• 9:30 AM UK time: UK construction PMI for the last month
• 6.30pm BST: BOE chief Bailey to speak at Scotland’s Global Investment Summit this year