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Investor Sentiment following Japan's Political Shift

FX analysts from major financial institutions have closed their previous positions to hold a bullish stance on the yen after Japan’s leading political group elected Takaichi as the new head.

In a report named “Leaving yen positions,” one lead strategist for currency analysis explained:

We went long JPY within our portfolio but have closed this after the party leadership vote. Takaichi’s unforeseen success creates too much uncertainty regarding Japan’s policy priorities as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

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

The strategist additionally noted indicators of government influence within Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Closes In On $4,000 per ounce Threshold

The gold price are reaching fresh record highs, again, in its strongest year since 1979.

The current price of bullion has jumped more than 1 percent this morning to $3,944 per ounce, nearing the $4000/oz mark.

This means bullion prices has increased half again since the start of January, on track for its top annual returns in over 45 years.

Bullion has advanced in recent months due to multiple reasons, among them increasing fears that public borrowing cannot be maintained.

Takaichi’s victory in Japan will only have reinforced concerns that politicians may try to boost output via increased debt and reduced rates, and depend on rising prices to diminish the worth of the resulting debt.

Trading Update

The Japanese equity market has rallied to unprecedented levels in Monday trading, while the yen is plunging, after the top position of the governing party was surprisingly won by fiscal dove Takaichi.

Expectations that the new leader is likely to be a PM favoring economic stimulus has sparked a surge of optimistic trading driving the Nikkei 225 share index higher by five percent, rising by 2315 points to finish at 48,085.

But the yen is very much moving downward – it dropped nearly two percent relative to the USD at 150.3¥/$.

Takaichi, who is expected to become Japan’s first female prime minister in the coming weeks, is a known fan of Margaret Thatcher. But although her social policies are right-leaning in social matters, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes higher state investment and loose monetary policy.

Therefore, she’s expected to maintain the national effort to boost economic growth though fiscal spending and lower interest rates, likely resulting in rising inflation and greater borrowing.

Hence yen depreciation, as markets predict reduced rate increases by Japanese authorities than before.

The nation’s debt securities are also down today, pushing up the return on thirty-year bonds approaching record highs, due to forecasts of higher borrowing and sustained inflationary pressures.

Investors are assessing how closely Sanae Takaichi’s plans will echo the “Abenomics” programme implemented by previous leader Abe.

One analyst explained:

In contrast to last year, she has not engaged from highlighting the three-arrow strategy in this LDP leadership campaign, but most know her fundamental position and her support of Shinzo Abe’s three-arrow approach.

Traders may therefore move for more information on that position, as well as exactly how influential she may be in forming the BoJ’s policy thinking, with the Bank of Japan’s October session is considered a potential turning point with a quarter-point increase considered likely...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for the previous month
• 9:30 AM UK time: UK construction PMI for the last month
• 18:30 BST: Bank of England governor Bailey to give keynote speech at an investment conference 2025