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Financial Market Response to the Japanese Leadership Election

Currency strategists from prominent investment firms have terminated their strategies for holding an optimistic view on Japan’s currency following the country’s ruling party chose Takaichi as its leader.

In a report titled “Leaving yen positions,” a lead strategist for currency analysis stated:

We went long JPY as part of our strategy but are now getting out due to the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty around Japan’s policy priorities and the timing of BoJ monetary tightening.

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

The expert also warned indicators of government influence in Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Nears the $4,000 Level

Gold prices are reaching fresh record highs, today, in its top-performing period since the late 1970s.

The immediate value of gold has jumped more than 1 percent today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This indicates the gold price has increased half again since January 1st, heading for its top annual returns since the Iranian Revolution.

Gold has been driven higher in recent months by several factors, among them rising concerns that public borrowing cannot be maintained.

The new leader’s election win in the party vote is likely amplifying concerns that leaders may try to secure growth by borrowing more and cheaper credit, and depend on rising prices to reduce the real value of new borrowings.

Trading Update

Tokyo’s bourse has rallied to unprecedented levels in Monday trading, as the yen falls, following the leadership of the LDP was surprisingly won by fiscal dove Sanae Takaichi.

Forecasts that Takaichi will be a PM favoring economic stimulus has sparked a wave of enthusiastic buying that has pushed Japan’s benchmark index up by 5%, adding more than 2300 points to finish at just over 48,000.

However, the currency is trending the opposite way – it dropped almost 2% versus the dollar to 150.3 yen per dollar.

Takaichi, set to be the first woman to lead Japan soon, is a long-time admirer of the former UK leader. Yet even though she is conservative in social matters, Takaichi takes an un-Thatcherite approach to fiscal policy, and promotes higher state investment and easy money policies.

Therefore, markets predict to persist with Japan’s push to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing higher inflation and more debt.

Hence the falling currency, as investors anticipate less monetary tightening in Tokyo compared to earlier expectations.

Japan’s government bond values are also down in Monday trading, lifting the return on its 30-year debt close to peak levels, due to forecasts of more government loans and sustained inflationary pressures.

The markets will be calculating the degree to which Sanae Takaichi’s proposals will echo the Abenomics strategy implemented by previous leader Shinzo Abe.

One analyst noted:

Different from previous comments, she has not engaged from highlighting the Abenomics program during the party election, but experts understand her core beliefs and her support of Abe’s Three Arrows approach.

Traders may therefore move to gain understanding on that position, and how much impact she could be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a key event and a rate rise considered likely...

Economic Calendar

• 8:30 AM UK time: European construction data for last month
• 9:30 AM UK time: UK building sector data for the last month
• 6:30 PM UK time: BOE chief Bailey to give keynote speech at Scotland’s Global Investment Summit 2025