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Investor Sentiment following the Japanese Ruling Party Vote

Foreign exchange experts at prominent investment firms have closed their positions to hold an optimistic view regarding Japan’s currency following Japan’s ruling party chose Sanae Takaichi as its head.

In a note titled “Getting out of the yen,” one lead strategist for currency analysis commented:

We held a long yen position within our portfolio but are now getting out following the LDP election outcome. The unexpected win by Takaichi brings back renewed unpredictability concerning the nation’s policy focus and the timing of interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist within the Japanese economy, but uncertainty is now going up again on how it will be dealt with.

The expert additionally noted indicators of government influence across Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Closes In On the $4,000/oz Mark

Gold prices are achieving fresh record highs, today, in its top-performing period since 1979.

The current price of bullion has surged by over 1% in recent trading at $3,944 an ounce, nearing the $4,000 threshold.

This means gold’s value has surged fifty percent from the beginning of the year, likely to achieve its strongest yearly performance in over 45 years.

Gold has been driven higher this year due to multiple reasons, such as growing worries that government debts may be unmanageable.

Takaichi’s election win in the party vote has further strengthened worries that leaders will attempt to boost output by borrowing more and reduced rates, and use inflation to erode the value of new borrowings.

Market Overview

The Japanese equity market has rallied to a record high today, with the currency dropping, after the chief role of the governing party was surprisingly won by fiscal dove Takaichi.

Predictions that Sanae Takaichi is likely to be a leader supporting government spending has triggered a surge of optimistic trading that has pushed Japan’s benchmark index higher by five percent, adding over 2300 points to finish at 48,085 points.

Yet the Japanese yen is very much moving in the other direction – it’s down nearly two percent against the US dollar at 150.3¥/$.

Takaichi, set to be the first woman to lead Japan in the coming weeks, is a long-time admirer of the former UK leader. However, while she is conservative in social matters, Takaichi takes an un-Thatcherite approach to fiscal policy, and has advocate a revival of government spending and easy money policies.

Therefore, markets predict to continue the country’s drive to spur activity through public investment and lower interest rates, which would lead to rising inflation and more debt.

As a result the weaker yen, with traders expecting reduced rate increases from the Bank of Japan compared to earlier expectations.

Japanese long-term bond prices have declined in Monday trading, lifting the return on thirty-year bonds near to all-time highs, because of predictions of more government loans and lasting price increases.

The markets will be calculating to what extent the new leader’s policies will resemble the policies of Shinzo Abe advocated by previous leader Shinzo Abe.

A market expert commented:

Unlike in late 2024, the leader has avoided from highlighting Abenomics in the recent vote, but most know her underlying stance and her approval of Shinzo Abe’s three-arrow strategy.

Markets could then push to obtain clarity on her policies, as well as exactly how influential she might become in shaping the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a key event and a rate rise seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for September
• 9.30am BST: British construction figures for the last month
• 6:30 PM UK time: Central bank head the BOE’s Andrew Bailey to give keynote speech at an investment conference this year