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Investor Sentiment following Japan's Political Shift

FX analysts from prominent banks have terminated their strategies to hold an optimistic view regarding the yen after Japan’s leading political group chose Sanae Takaichi as the new chief.

In a report named “Getting out of the yen,” a lead strategist for currency analysis explained:

We went long JPY as part of our strategy but have closed this after the party leadership vote. Sanae Takaichi’s surprise victory creates renewed unpredictability regarding Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflation is a problem in Japan, but doubts are resurfacing regarding how it will be addressed.

The analyst additionally noted that signs of fiscal dominance within Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Nears $4,000 per ounce Level

Bullion values are hitting unprecedented levels, once more, in its strongest year since the late 1970s.

The spot price of bullion has climbed by 1% or more in recent trading at $3,944 an ounce, approaching the $4,000 threshold.

This shows bullion prices has surged fifty percent since the start of January, heading for its best annual gains since the Iranian Revolution.

Bullion has advanced throughout the year by several factors, among them growing worries that national debt levels are unsustainable.

The new leader’s victory in the party vote will only have reinforced worries that politicians could seek to boost output through higher borrowing and reduced rates, and depend on rising prices to erode the value of the resulting debt.

Market Overview

The Japanese equity market has rallied to unprecedented levels this morning, 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 PM favoring economic stimulus has sparked a wave of enthusiastic buying driving the Tokyo stock index higher by five percent, as it gained more than 2300 points to finish at 48,085 points.

But the yen is very much moving in the other direction – it’s down about 2 percent relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the first woman to lead Japan in the coming weeks, is a known fan of Margaret Thatcher. However, while she holds conservative views in social matters, Takaichi adopts a different strategy in economic policy, and promotes higher state investment and easy money policies.

Therefore, analysts anticipate to continue the national effort to boost economic growth though fiscal spending and cheap credit, which would lead to rising inflation and more debt.

Hence the weaker yen, as investors anticipate reduced rate increases in Tokyo relative to previous forecasts.

Japan’s government bond values are also down in Monday trading, lifting the yield on long-term Japanese bonds close to all-time highs, because of predictions of more government loans and more persistent inflation.

Traders are evaluating the degree to which Sanae Takaichi’s policies will echo the Abenomics strategy advocated by previous leader Shinzo Abe.

A market expert explained:

Unlike in late 2024, Takaichi has refrained from promoting the Abenomics program in the recent vote, but experts understand her underlying stance and her approval of Shinzo Abe’s three-pillar approach.

Markets could then push to obtain clarity on her policies, plus the degree of influence she might become in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase seen as a real possibility...

Economic Calendar

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: Central bank head Andrew Bailey to deliver address at Scotland’s Global Investment Summit 2025