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Financial Market Response following the Japanese Leadership Election

Currency strategists at major financial institutions have closed their strategies to hold a long position on Japan’s currency following Japan’s leading political group selected Sanae Takaichi as its chief.

In a note named “Exiting the yen,” a lead strategist for foreign exchange stated:

We held a long yen position in our FX Blueprint but have closed this due to the party leadership vote. The unexpected win by Takaichi reintroduces significant doubt around the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflation is a problem in Japan, but doubts are resurfacing on how it will be dealt with.

The analyst additionally noted that signs of fiscal dominance within Japan (where the government controls monetary policy decisions) pose a potential danger.

Gold Approaches $4,000 per ounce Threshold

Gold prices are reaching unprecedented levels, again, during its best performance since the late 1970s.

The immediate value of gold has climbed more than 1 percent this morning reaching $3,944/oz, approaching the $4,000 per ounce level.

This indicates bullion prices has surged half again from the beginning of the year, on track for its strongest yearly performance since the Iranian Revolution.

The metal has risen throughout the year by several factors, including growing worries that national debt levels may be unmanageable.

The new leader’s victory in the party vote is likely amplifying apprehensions that politicians may try to stimulate the economy via increased debt and cheaper credit, and depend on rising prices to erode the value of the resulting debt.

Market Overview

The Japanese equity market has surged to unprecedented levels in Monday trading, with the currency dropping, following the top position of the governing party was unexpectedly secured by spending advocate Sanae Takaichi.

Forecasts that Sanae Takaichi is likely to be a leader supporting government spending has sparked a wave of enthusiastic buying that has pushed the Tokyo stock index higher by five percent, rising by over 2300 points to finish at just over 48,000.

Yet the Japanese yen is trending the opposite way – it has fallen almost 2% relative to the USD at 150.3¥/$.

Sanae Takaichi, who should become the first woman to lead Japan in the coming weeks, has long admired of the former UK leader. But although she is conservative on social policy, the new leader follows a contrasting path to fiscal policy, and has advocate higher state investment and accommodative central bank measures.

As such, she’s expected to continue the national effort to boost economic growth through public investment and cheap credit, which would lead to increased price pressures and greater borrowing.

As a result the falling currency, as investors anticipate less monetary tightening by Japanese authorities than before.

The nation’s debt securities have declined today, pushing up the return on its 30-year debt near to peak levels, on expectations of higher borrowing and more persistent inflation.

Investors are assessing to what extent Takaichi’s policies will resemble the “Abenomics” programme implemented by ex-prime minister Abe.

One analyst noted:

Unlike in late 2024, Takaichi has refrained from promoting the Abenomics program in the recent vote, but many are aware her core beliefs and her support of Abe’s three-arrow approach.

Traders may therefore move to obtain clarity on that position, and how much impact she might become in forming monetary policy, ahead of the BoJ’s next meeting is viewed as a potential turning point with a quarter-point increase considered likely...

Market Agenda

• 8.30am BST: Eurozone construction PMI for last month
• 09:30 BST: British construction figures for the last month
• 18:30 BST: Central bank head Andrew Bailey to speak at a financial forum this year