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Financial Market Response following Japan's Leadership Election

Currency strategists from prominent banks have terminated their strategies for holding an optimistic view regarding Japan’s currency after Japan’s leading political group elected Takaichi as its head.

In a report called “Exiting the yen,” one global head of FX research explained:

We went long JPY within our portfolio but are now getting out after the weekend’s election result. The unexpected win by Takaichi brings back too much uncertainty regarding Japan’s policy priorities and the timing of the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The analyst also warned evidence of political control within Japan (where the government controls the BoJ’s moves) pose a potential danger.

Gold Nears the $4,000/oz Mark

The gold price are achieving fresh record highs, once more, during its best performance since 1979.

The spot price of gold has jumped by over 1% this morning at $3,944 an ounce, nearing the $4,000 threshold.

This means gold’s value has increased by 50% from the beginning of the year, on track for its best annual gains in over 45 years.

Gold has been driven higher throughout the year by several factors, including rising concerns that national debt levels may be unmanageable.

Takaichi’s success in the Japanese election is likely amplifying worries that leaders could seek to boost output via increased debt and lower interest rates, and rely on inflation to erode the value of accumulated debt.

Trading Update

The Japanese equity market has surged to a record high today, while the yen is plunging, after the chief role of the governing party went unexpectedly to by stimulus supporter Sanae Takaichi.

Predictions that Sanae Takaichi is likely to be a pro-stimulus prime minister has ignited a surge of optimistic trading that has pushed the Nikkei 225 share index to a 5% gain, rising by more than 2300 points ending at just over 48,000.

But the yen is heading the opposite way – it’s down almost 2% versus the dollar to 150.3 yen per dollar.

Takaichi, set to be Japan’s first female prime minister soon, is a known fan of the former UK leader. Yet even though she is conservative regarding social issues, Takaichi adopts a different strategy in economic policy, and supports increased public expenditure and easy money policies.

Therefore, markets predict to continue the national effort to spur activity via government outlays and lower interest rates, likely resulting in higher inflation and greater borrowing.

Hence the falling currency, with traders expecting reduced rate increases from the Bank of Japan compared to earlier expectations.

The nation’s debt securities have declined in Monday trading, pushing up the interest rate on its 30-year debt near to peak levels, due to forecasts of higher borrowing and lasting price increases.

Traders will be calculating the degree to which the new leader’s plans will echo the “Abenomics” programme pushed by former PM Shinzo Abe.

A market expert explained:

In contrast to last year, she has not engaged from highlighting the three-arrow strategy in this LDP leadership campaign, but many are aware her underlying stance and her appreciation of the former PM’s Three Arrows philosophy.

Traders may therefore move to obtain clarity on that position, and how much impact she may be in forming monetary policy, ahead of the BoJ’s next meeting is viewed as a potential turning point and a 25bp hike considered likely...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for last month
• 09:30 BST: UK building sector data for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to deliver address at a financial forum 2025