🔗 Share this article

Financial Market Response to Japan's Political Shift

Foreign exchange experts from prominent banks have terminated their previous strategies for holding a bullish stance on Japan’s currency after Japan’s leading political group chose Takaichi as its head.

In a report named “Exiting the yen,” a chief for foreign exchange explained:

We went long JPY as part of our strategy but have now exited following the party leadership vote. The unexpected win by Takaichi brings back too much uncertainty around the nation’s policy focus and the expected date of interest rate increases by the Bank of Japan.

Experts agree that inflation is a problem within the Japanese economy, but uncertainty is now going up again regarding how it will be addressed.

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

Gold Approaches the $4,000/oz Mark

The gold price are hitting fresh record highs, today, in its strongest year since the late 1970s.

The immediate value of gold has jumped by 1% or more this morning at $3,944 an ounce, as it closes in on the $4000/oz mark.

This indicates the gold price has increased half again from the beginning of the year, likely to achieve its best annual gains since the late 1970s.

Bullion has advanced in recent months due to multiple reasons, such as growing worries that public borrowing are unsustainable.

Sanae Takaichi’s victory in the party vote is likely amplifying concerns that politicians may try to secure growth through higher borrowing and cheaper credit, and use inflation to reduce the real value of the resulting debt.

Market Overview

The Japanese equity market has surged to unprecedented levels in Monday trading, with the currency dropping, following the top position of the country’s ruling party was unexpectedly secured by stimulus supporter Takaichi.

Forecasts that the new leader will become a leader supporting government spending has ignited a wave of enthusiastic buying lifting the Nikkei 225 share index to a 5% gain, rising by more than 2300 points ending at 48,085.

Yet the Japanese yen is heading downward – it dropped nearly two percent against the US dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan soon, is a long-time admirer of Thatcher. Yet even though she is conservative regarding social issues, she follows a contrasting path on budget matters, and has advocate a revival of government spending and accommodative central bank measures.

Therefore, markets predict to continue the national effort to spur activity though fiscal spending and reduced borrowing costs, potentially causing higher inflation and greater borrowing.

As a result yen depreciation, as markets predict fewer interest rates hikes from the Bank of Japan compared to earlier expectations.

Japan’s government bond values have also fallen this session, pushing up the return on long-term Japanese bonds close to record highs, due to forecasts of more government loans and more persistent inflation.

Traders are assessing the degree to which Takaichi’s policies will resemble the Abenomics strategy advocated by ex-prime minister Shinzo Abe.

One analyst explained:

Unlike in late 2024, she has not engaged from promoting Abenomics in the recent vote, but experts understand her core beliefs and her approval of Abe’s three-pillar philosophy.

Investors might thus seek to gain understanding on that position, and how much impact she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is viewed as a “live” affair with a quarter-point increase potentially on the table...

Economic Calendar

• 8:30 AM UK time: Euro area building activity for last month
• 9:30 AM UK time: UK construction PMI for September
• 6:30 PM UK time: BOE chief Andrew Bailey to speak at a financial forum 2025