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Investor Sentiment to Japan's Leadership Election

FX analysts at major investment firms have terminated their positions for holding an optimistic view on Japan’s currency following the country’s leading political group selected Takaichi as the new head.

In a note titled “Leaving yen positions,” one global head of FX research stated:

We went long JPY within our portfolio but have closed this following the party leadership vote. Sanae Takaichi’s surprise victory creates significant doubt around Japan’s policy priorities and the timing of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem in Japan, but uncertainty is now going up again regarding how it will be addressed.

The expert additionally noted evidence of political control across Japan (in which politicians direct the BoJ’s moves) are a tail risk.

Gold Approaches the $4,000 Level

Bullion values are reaching fresh record highs, once more, in its top-performing period since the late 1970s.

The current price of the precious metal has climbed more than 1 percent in recent trading reaching $3,944/oz, approaching the $4000/oz mark.

This shows bullion prices has surged half again since January 1st, heading for its strongest yearly performance since the Iranian Revolution.

Bullion has advanced in recent months due to multiple reasons, such as increasing fears that government debts may be unmanageable.

The new leader’s election win in the party vote has further strengthened concerns that leaders could seek to stimulate the economy via increased debt and reduced rates, and use inflation to diminish the worth of the resulting debt.

Trading Update

The Japanese equity market has jumped to unprecedented levels today, while the yen is plunging, after the chief role of the governing party was surprisingly won by stimulus supporter Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has sparked a wave of enthusiastic buying lifting Japan’s benchmark index higher by five percent, rising by over 2300 points to close at 48,085.

But the yen is heading downward – it dropped almost 2% against the US dollar to 150.3 yen per dollar.

Takaichi, who is expected to become the first woman to lead Japan in the coming weeks, is a known fan of Margaret Thatcher. Yet even though her social policies are right-leaning regarding social issues, she adopts a different strategy in economic policy, and supports increased public expenditure and easy money policies.

As such, markets predict to continue Japan’s push to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing increased price pressures and greater borrowing.

Hence the falling currency, as investors anticipate reduced rate increases in Tokyo relative to previous forecasts.

Japan’s government bond values have declined in Monday trading, lifting the return on thirty-year bonds close to record highs, on expectations of higher borrowing and sustained inflationary pressures.

The markets will be calculating to what extent the new leader’s plans will echo the Abenomics strategy advocated by former PM Shinzo Abe.

A brokerage head commented:

In contrast to last year, the leader has avoided from talking up Abenomics during the party election, but many are aware her fundamental position and her support of Shinzo Abe’s three-pillar philosophy.

Investors might thus seek to obtain clarity regarding her stance, as well as exactly how influential she may be in forming the central bank’s decisions, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike seen as a real possibility...

Today’s Schedule

• 8:30 AM UK time: European construction data for September
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: BOE chief Andrew Bailey to speak at Scotland’s Global Investment Summit 2025