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Investor Sentiment following the Japanese Leadership Election

Currency strategists from leading banks have reportedly exited their previous recommendations to hold a bullish stance on the Japanese yen after the country’s governing party elected Takaichi as the new chief.

In commentary called “Getting out of the yen,” a lead strategist for foreign exchange commented:

We held a long yen position in our FX Blueprint but have now exited after the weekend’s election result. Takaichi’s unforeseen success creates renewed unpredictability around Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue in Japan, but uncertainty is now going up again on how it will be dealt with.

The analyst further cautioned evidence of political control across Japan (where the government controls monetary policy decisions) represent a downside risk.

Gold Closes In On the $4,000/oz Threshold

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

The spot price of bullion has climbed by 1% or more today reaching $3,944/oz, approaching the $4000/oz mark.

This means gold’s value has increased fifty percent since January 1st, on track for its strongest yearly performance in over 45 years.

Gold has been driven higher this year because of various drivers, such as growing worries that government debts are unsustainable.

Sanae Takaichi’s election win in Japan is likely amplifying concerns that leaders will attempt to secure growth via increased debt and lower interest rates, and rely on inflation to diminish the worth of accumulated debt.

Financial Summary

Tokyo’s bourse has rallied to unprecedented levels in Monday trading, while the yen is plunging, following the leadership of the LDP went unexpectedly to by stimulus supporter Sanae Takaichi.

Expectations that Takaichi will become a pro-stimulus prime minister has triggered a wave of enthusiastic buying that has pushed the Tokyo stock index up by 5%, adding 2315 points ending at 48,085.

Yet the Japanese yen is trending in the other direction – it’s down nearly two percent against the US dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the nation’s initial woman PM soon, has long admired of the former UK leader. Yet even though her social policies are right-leaning on social policy, she follows a contrasting path on budget matters, and supports increased public expenditure and loose monetary policy.

Therefore, she’s expected to persist with the national effort to stimulate its economy via government outlays and reduced borrowing costs, potentially causing increased price pressures and increased borrowing.

As a result the falling currency, as investors anticipate less monetary tightening from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined today, pushing up the interest rate on long-term Japanese bonds approaching peak levels, because of predictions of more government loans and lasting price increases.

Investors are assessing the degree to which Takaichi’s proposals will echo the “Abenomics” programme advocated by ex-prime minister Shinzo Abe.

A market expert noted:

Unlike in late 2024, she has not engaged from highlighting the Abenomics program in this LDP leadership campaign, but most know her core beliefs and her approval of Shinzo Abe’s three-arrow approach.

Traders may therefore move to gain understanding regarding her stance, as well as exactly how influential she could be in directing the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a “live” affair and a 25bp hike potentially on the table...

Economic Calendar

• 08:30 British Summer Time: European construction data for September
• 9.30am BST: British construction figures for September
• 6.30pm BST: Bank of England governor Bailey to speak at a financial forum this year