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Investor Sentiment to the Japanese Leadership Election

Foreign exchange experts from prominent investment firms have terminated their previous positions for holding a long position on the Japanese yen after Japan’s governing party selected Sanae Takaichi as its head.

In commentary called “Getting out of the yen,” a global head for foreign exchange explained:

Our strategy was bullish on the yen as part of our strategy but are now getting out after the weekend’s election result. The unexpected win by Takaichi creates renewed unpredictability regarding Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

There is agreement that inflationary pressures exist for Japan, but uncertainty is now going up again regarding how it will be addressed.

The strategist also warned that signs of fiscal dominance across Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Nears the $4,000/oz Level

Bullion values are reaching unprecedented levels, again, in its top-performing period in over four decades.

The current price of bullion has jumped by 1% or more today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This indicates the gold price has jumped fifty percent since January 1st, on track for its strongest yearly performance since the Iranian Revolution.

Bullion has advanced in recent months by several factors, including rising concerns that public borrowing may be unmanageable.

Takaichi’s success in the party vote is likely amplifying apprehensions that government officials will attempt to stimulate the economy through higher borrowing and reduced rates, and use inflation to erode the value of the resulting debt.

Market Overview

Japan’s stock market has jumped to an all-time peak this morning, while the yen is plunging, after the top position of the LDP was surprisingly won by spending advocate Takaichi.

Forecasts that Sanae Takaichi will become a pro-stimulus prime minister has sparked a rush of positive investment driving the Tokyo stock index higher by five percent, adding more than 2300 points to close at just over 48,000.

Yet the Japanese yen is heading the opposite way – it dropped almost 2% against the US dollar to 150.3 yen per dollar.

The incoming leader, set to be Japan’s first female prime minister in the coming weeks, is a known fan of Margaret Thatcher. However, while she is conservative on social policy, the new leader follows a contrasting path in economic policy, and has advocate a revival of government spending and easy money policies.

As such, markets predict to continue the country’s drive to spur activity via government outlays and reduced borrowing costs, potentially causing rising inflation and increased borrowing.

Thus the weaker yen, as investors anticipate less monetary tightening in Tokyo than before.

Japanese long-term bond prices have declined today, driving higher the interest rate on long-term Japanese bonds approaching peak levels, on expectations of increased debt issuance and sustained inflationary pressures.

The markets will be calculating the degree to which Takaichi’s policies will echo the “Abenomics” programme implemented by ex-prime minister Shinzo Abe.

A brokerage head commented:

Unlike in late 2024, the leader has avoided from promoting Abenomics in this LDP leadership campaign, but many are aware her fundamental position and her support of Shinzo Abe’s Three Arrows approach.

Markets could then push to obtain clarity on that position, as well as exactly how influential she could be in shaping monetary policy, with the Bank of Japan’s October session is considered a “live” affair with a quarter-point increase potentially on the table...

Market Agenda

• 8.30am BST: Euro area building activity for the previous month
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: BOE chief the BOE’s Andrew Bailey to speak at an investment conference 2025