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Investor Sentiment to Japan's Political Shift

FX analysts at prominent financial institutions have reportedly terminated their previous strategies to hold an optimistic view regarding the Japanese yen following Japan’s governing party selected Sanae Takaichi as its leader.

In a report titled “Leaving yen positions,” one chief for currency analysis stated:

We went long JPY as part of our strategy but are now getting out after the weekend’s election result. Sanae Takaichi’s surprise victory reintroduces significant doubt regarding Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem within the Japanese economy, but doubts are resurfacing about the approach to managing it.

The expert further cautioned that signs of fiscal dominance in Japan (in which politicians direct monetary policy decisions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

Gold prices are reaching new all-time peaks, once more, in its strongest year in over four decades.

The current price of the precious metal has climbed more than 1 percent this morning to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This indicates the gold price has increased half again since the start of January, on track for its strongest yearly performance since the late 1970s.

Gold has been driven higher throughout the year by several factors, including rising concerns that national debt levels cannot be maintained.

The new leader’s victory in Japan has further strengthened worries that government officials will attempt to secure growth via increased debt and reduced rates, and depend on rising prices to diminish the worth of new borrowings.

Trading Update

Tokyo’s bourse has jumped to an all-time peak this morning, while the yen is plunging, after the leadership of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Forecasts that the new leader will be a leader supporting government spending has triggered a surge of optimistic trading that has pushed the Nikkei 225 share index up by 5%, rising by 2315 points to close at 48,085 points.

However, the currency is very much moving in the other direction – it dropped about 2 percent against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, who is expected to become the first woman to lead Japan soon, is a known fan of Margaret Thatcher. But although she holds conservative views on social policy, Takaichi adopts a different strategy on budget matters, and promotes increased public expenditure and accommodative central bank measures.

Therefore, she’s expected to continue the national effort to spur activity through public investment and reduced borrowing costs, likely resulting in increased price pressures and increased borrowing.

Thus the weaker yen, as investors anticipate reduced rate increases in Tokyo than before.

Japanese long-term bond prices have declined this session, pushing up the interest rate on thirty-year bonds near to all-time highs, on expectations of more government loans and sustained inflationary pressures.

Investors are evaluating how closely the new leader’s policies will mirror the policies of Shinzo Abe implemented by ex-prime minister Abe.

A brokerage head commented:

Unlike in late 2024, Takaichi has refrained from promoting the three-arrow strategy during the party election, but many are aware her core beliefs and her support of the former PM’s three-arrow approach.

Investors might thus seek to gain understanding on her policies, plus the degree of influence she could be in shaping the BoJ’s policy thinking, with the Bank of Japan’s October session is viewed as a potential turning point and a rate rise potentially on the table...

Market Agenda

• 8.30am BST: Eurozone construction PMI for the previous month
• 09:30 BST: British construction figures for September
• 6:30 PM UK time: BOE chief Bailey to speak at an investment conference this year