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Investor Sentiment following Japan's Political Shift

Foreign exchange experts at leading banks have terminated their positions to hold a bullish stance regarding the yen after the country’s governing party elected Sanae Takaichi to be its chief.

In a note called “Exiting the yen,” one chief for foreign exchange explained:

We held a long yen position as part of our strategy but are now getting out due to the party leadership vote. Sanae Takaichi’s surprise victory creates significant doubt around Japanese economic goals as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that rising prices are an issue for Japan, but questions are mounting regarding how it will be addressed.

The analyst also warned evidence of political control in Japan (where the government controls the BoJ’s moves) are a tail risk.

Gold Closes In On the $4,000 Mark

Gold prices are reaching new all-time peaks, again, in its top-performing period in over four decades.

The immediate value of bullion has climbed by over 1% today reaching $3,944/oz, approaching the $4,000 threshold.

This indicates gold’s value has increased fifty percent since January 1st, heading for its top annual returns in over 45 years.

Bullion has advanced in recent months because of various drivers, such as increasing fears that public borrowing may be unmanageable.

The new leader’s victory in Japan has further strengthened concerns that government officials could seek to stimulate the economy by borrowing more and lower interest rates, and use inflation to erode the value of the resulting debt.

Financial Summary

The Japanese equity market has rallied to a record high today, while the yen is plunging, following the chief role of the country’s ruling party was unexpectedly secured by fiscal dove Sanae Takaichi.

Expectations that Takaichi will become a PM favoring economic stimulus has ignited a surge of optimistic trading driving the Nikkei 225 share index higher by five percent, adding over 2300 points to finish at 48,085.

Yet the Japanese yen is heading in the other direction – it has fallen about 2 percent versus the dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the first woman to lead Japan later this month, is a long-time admirer of Thatcher. But although her social policies are right-leaning on social policy, she adopts a different strategy to fiscal policy, and supports higher state investment and loose monetary policy.

Therefore, analysts anticipate to maintain the country’s drive to boost economic growth via government outlays and lower interest rates, likely resulting in rising inflation and increased borrowing.

Thus the weaker yen, as investors anticipate fewer interest rates hikes from the Bank of Japan relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, lifting the return on its 30-year debt near to peak levels, because of predictions of more government loans and more persistent inflation.

Investors will be calculating to what extent Sanae Takaichi’s policies will resemble the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

One analyst commented:

Different from previous comments, she has not engaged from promoting the Abenomics program during the party election, but many are aware her underlying stance and her approval of the former PM’s Three Arrows strategy.

Traders may therefore move to obtain clarity regarding her stance, and how much impact she might become in directing the central bank’s decisions, ahead of the BoJ’s next meeting is seen as a potential turning point and a 25bp hike potentially on the table...

Market Agenda

• 8.30am BST: Euro area building activity for last month
• 09:30 BST: UK construction PMI for September
• 6:30 PM UK time: BOE chief Bailey to deliver address at Scotland’s Global Investment Summit 2025