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Financial Market Response to the Japanese Leadership Election

FX analysts from prominent banks have reportedly terminated their previous recommendations to hold a long position regarding the Japanese yen after the country’s ruling party chose Sanae Takaichi to be its leader.

In a note named “Getting out of the yen,” a chief of FX research explained:

We held a long yen position within our portfolio but have now exited after the LDP election outcome. The unexpected win by Takaichi creates significant doubt concerning the nation’s policy focus as well as the schedule for BoJ monetary tightening.

Experts agree that inflation is a problem in Japan, but questions are mounting regarding how it will be addressed.

The strategist additionally noted evidence of political control within Japan (where the government controls the central bank’s actions) are a tail risk.

Gold Approaches $4,000 per ounce Threshold

Gold prices are reaching new all-time peaks, again, in its strongest year since the late 1970s.

The current price of bullion has surged by 1% or more in recent trading to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This shows the gold price has jumped by 50% since the start of January, on track for its strongest yearly performance in over 45 years.

Gold has been driven higher throughout the year due to multiple reasons, among them increasing fears that public borrowing may be unmanageable.

Sanae Takaichi’s election win in the Japanese election is likely amplifying apprehensions that leaders may try to boost output via increased debt and cheaper credit, and rely on inflation to erode the value of accumulated debt.

Market Overview

Japan’s stock market has jumped to an all-time peak today, while the yen is plunging, following the top position of the governing party was surprisingly won by fiscal dove Sanae Takaichi.

Expectations that Takaichi will be a leader supporting government spending has triggered a rush of positive investment driving the Nikkei 225 share index to a 5% gain, as it gained 2315 points to finish at just over 48,000.

Yet the Japanese yen is very much moving in the other direction – it’s down about 2 percent relative to the USD at 150.3¥/$.

Sanae Takaichi, who is expected to become the nation’s initial woman PM later this month, has long admired of Margaret Thatcher. Yet even though her social policies are right-leaning regarding social issues, Takaichi follows a contrasting path to fiscal policy, and has advocate a revival of government spending and loose monetary policy.

Consequently, she’s expected to continue Japan’s push to stimulate its economy via government outlays and cheap credit, likely resulting in rising inflation and increased borrowing.

Thus the weaker yen, as investors anticipate less monetary tightening by Japanese authorities than before.

Japan’s government bond values have declined today, driving higher the yield on long-term Japanese bonds near to all-time highs, due to forecasts of more government loans and sustained inflationary pressures.

Investors are evaluating the degree to which Sanae Takaichi’s plans will mirror the Abenomics strategy pushed by ex-prime minister Abe.

One analyst commented:

Different from previous comments, the leader has avoided from promoting Abenomics during the party election, but experts understand her underlying stance and her approval of Abe’s Three Arrows approach.

Investors might thus seek to obtain clarity on her policies, as well as exactly how influential she could be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a potential turning point with a quarter-point increase potentially on the table...

Market Agenda

• 8.30am BST: Euro area building activity for September
• 09:30 BST: UK building sector data for September
• 18:30 BST: Central bank head Andrew Bailey to speak at a financial forum 2025