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Market Reactions to the Japanese Leadership Election

Currency strategists from leading investment firms have reportedly exited their recommendations to hold an optimistic view regarding the Japanese yen after the country’s governing party chose Sanae Takaichi as its head.

In a note titled “Leaving yen positions,” one lead strategist for foreign exchange stated:

We held a long yen position within our portfolio but are now getting out after the LDP election outcome. Sanae Takaichi’s surprise victory creates significant doubt concerning Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The strategist also warned evidence of political control in Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Approaches the $4,000 Threshold

Gold prices are achieving unprecedented levels, again, during its best performance since 1979.

The immediate value of the precious metal has climbed more than 1 percent in recent trading at $3,944 an ounce, nearing the $4,000 threshold.

This shows bullion prices has increased by 50% since January 1st, heading for its strongest yearly performance since the late 1970s.

The metal has risen throughout the year by several factors, such as increasing fears that public borrowing are unsustainable.

The new leader’s success in the Japanese election is likely amplifying worries that leaders will attempt to stimulate the economy via increased debt and reduced rates, and rely on inflation to erode the value of accumulated debt.

Financial Summary

Tokyo’s bourse has rallied to an all-time peak in Monday trading, as the yen falls, after the top position of the governing party was unexpectedly secured by fiscal dove Sanae Takaichi.

Expectations that the new leader will become a PM favoring economic stimulus has sparked a wave of enthusiastic buying lifting Japan’s benchmark index up by 5%, adding 2315 points ending at 48,085 points.

However, the currency is heading in the other direction – it has fallen about 2 percent versus the dollar at 150.3¥/$.

The incoming leader, set to be the first woman to lead Japan soon, is a long-time admirer of Margaret Thatcher. However, while she is conservative in social matters, she follows a contrasting path in economic policy, and supports a revival of government spending and easy money policies.

Therefore, she’s expected to continue Japan’s push to stimulate its economy through public investment and lower interest rates, which would lead to increased price pressures and greater borrowing.

Thus the weaker yen, with traders expecting reduced rate increases by Japanese authorities relative to previous forecasts.

Japan’s government bond values have also fallen in Monday trading, pushing up the return on long-term Japanese bonds near to record highs, on expectations of increased debt issuance and more persistent inflation.

Investors are evaluating how closely Sanae Takaichi’s policies will echo the policies of Shinzo Abe pushed by ex-prime minister Shinzo Abe.

One analyst noted:

Unlike in late 2024, she has not engaged from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her core beliefs and her appreciation of Shinzo Abe’s Three Arrows approach.

Markets could then push for more information on that position, as well as exactly how influential she might become in forming the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a key event with a quarter-point increase considered likely...

Economic Calendar

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 09:30 BST: UK building sector data for the last month
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to give keynote speech at an investment conference this year