🔗 Share this article

Investor Sentiment to the Japanese Leadership Election

Currency strategists at leading banks have exited their previous recommendations to hold an optimistic view on Japan’s currency following the country’s leading political group selected Takaichi as the new head.

In a note called “Getting out of the yen,” one lead strategist for foreign exchange explained:

We went long JPY as part of our strategy but have closed this due to the LDP election outcome. Takaichi’s unforeseen success brings back too much uncertainty concerning Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue in Japan, but questions are mounting about the approach to managing it.

The analyst also warned indicators of government influence across Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Closes In On the $4,000 Level

Gold prices are achieving new all-time peaks, once more, in its top-performing period in over four decades.

The spot price of bullion has surged more than 1 percent in recent trading to $3,944 per ounce, as it closes in on the $4,000 threshold.

This indicates gold’s value has increased fifty percent since January 1st, likely to achieve its best annual gains in over 45 years.

Bullion has advanced throughout the year because of various drivers, among them increasing fears that government debts are unsustainable.

The new leader’s election win in Japan is likely amplifying concerns that government officials could seek to stimulate the economy through higher borrowing and reduced rates, and rely on inflation to erode the value of accumulated debt.

Financial Summary

The Japanese equity market has jumped to unprecedented levels today, with the currency dropping, following the top position of the country’s ruling party was unexpectedly secured by fiscal dove Sanae Takaichi.

Forecasts that Sanae Takaichi will be a leader supporting government spending has triggered a rush of positive investment that has pushed the Nikkei 225 share index up by 5%, adding over 2300 points to finish at 48,085.

However, the currency is trending downward – it dropped almost 2% versus the dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan soon, has long admired of Margaret Thatcher. But although she holds conservative views regarding social issues, the new leader follows a contrasting path to fiscal policy, and promotes a revival of government spending and accommodative central bank measures.

Consequently, she’s expected to persist with Japan’s push to stimulate its economy through public investment and reduced borrowing costs, potentially causing rising inflation and increased borrowing.

As a result the weaker yen, as markets predict reduced rate increases in Tokyo than before.

Japanese long-term bond prices are also down in Monday trading, lifting the interest rate on its 30-year debt approaching record highs, due to forecasts of higher borrowing and lasting price increases.

The markets will be calculating to what extent Sanae Takaichi’s proposals will echo the Abenomics strategy advocated by ex-prime minister Abe.

A market expert noted:

Unlike in late 2024, the leader has avoided from promoting the three-arrow strategy in the recent vote, but experts understand her fundamental position and her approval of the former PM’s three-arrow approach.

Markets could then push to gain understanding regarding her stance, as well as exactly how influential she might become in directing the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair and a rate rise seen as a real possibility...

Today’s Schedule

• 8.30am BST: Euro area building activity for September
• 9:30 AM UK time: UK construction PMI for the last month
• 6.30pm BST: Central bank head Bailey to speak at a financial forum this year