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Investor Sentiment following Japan's Leadership Election

FX analysts from prominent financial institutions have exited their previous positions for holding a bullish stance regarding the Japanese yen following the country’s leading political group elected Sanae Takaichi as its chief.

In commentary titled “Leaving yen positions,” a lead strategist for currency analysis stated:

Our strategy was bullish on the yen as part of our strategy but have closed this due to the weekend’s election result. Sanae Takaichi’s surprise victory creates significant doubt regarding Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

There is agreement that rising prices are an issue for Japan, but questions are mounting about the approach to managing it.

The expert also warned that signs of fiscal dominance across Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Closes In On $4,000 per ounce Mark

Gold prices are achieving new all-time peaks, once more, in its strongest year since the late 1970s.

The current price of gold has jumped by over 1% today to $3,944 per ounce, nearing the $4,000 threshold.

This means the gold price has increased fifty percent from the beginning of the year, on track for its best annual gains in over 45 years.

Gold has been driven higher in recent months by several factors, including increasing fears that public borrowing cannot be maintained.

Sanae Takaichi’s victory in the Japanese election will only have reinforced concerns that government officials could seek to secure growth via increased debt and lower interest rates, and use inflation to diminish the worth of new borrowings.

Market Overview

The Japanese equity market has rallied to unprecedented levels today, as the yen falls, following the top position of the governing party was surprisingly won by spending advocate Takaichi.

Forecasts that the new leader will be a pro-stimulus prime minister has sparked a rush of positive investment that has pushed the Nikkei 225 share index higher by five percent, as it gained over 2300 points to finish at 48,085.

Yet the Japanese yen is heading downward – it dropped nearly two percent versus the dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become the nation’s initial woman PM later this month, is a long-time admirer of Margaret Thatcher. However, while her social policies are right-leaning on social policy, she follows a contrasting path in economic policy, and supports increased public expenditure and easy money policies.

As such, markets predict to maintain Japan’s push to spur activity through public investment and reduced borrowing costs, likely resulting in rising inflation and greater borrowing.

Hence the weaker yen, as markets predict less monetary tightening in Tokyo relative to previous forecasts.

Japanese long-term bond prices have declined this session, driving higher the interest rate on thirty-year bonds close to record highs, because of predictions of higher borrowing and sustained inflationary pressures.

The markets are evaluating to what extent Takaichi’s policies will mirror the policies of Shinzo Abe pushed by former PM Abe.

A market expert noted:

Different from previous comments, the leader has avoided from talking up Abenomics in this LDP leadership campaign, but most know her fundamental position and her approval of Shinzo Abe’s three-pillar approach.

Investors might thus seek for more information regarding her stance, as well as exactly how influential she might become in directing the BoJ’s policy thinking, given the October BoJ meeting is viewed as a potential turning point and a rate rise considered likely...

Today’s Schedule

• 8.30am BST: Euro area building activity for last month
• 9:30 AM UK time: UK construction PMI for September
• 6.30pm BST: Central bank head Bailey to give keynote speech at an investment conference 2025