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Investor Sentiment following Japan's Ruling Party Vote

Foreign exchange experts from leading banks have exited their positions to hold an optimistic view on the Japanese yen after Japan’s governing party selected Takaichi as its leader.

In a note titled “Exiting the yen,” a lead strategist for currency analysis commented:

Our strategy was bullish on the yen in our FX Blueprint but have now exited due to the LDP election outcome. Takaichi’s unforeseen success creates significant doubt regarding the nation’s policy focus and the expected date of BoJ monetary tightening.

There is agreement that inflation is a problem in Japan, but questions are mounting about the approach to managing it.

The analyst further cautioned evidence of political control across Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Nears the $4,000 Level

Bullion values are reaching fresh record highs, once more, during its best performance since 1979.

The spot price of bullion has jumped more than 1 percent today at $3,944 an ounce, approaching the $4000/oz mark.

This indicates gold’s value has surged half again since January 1st, likely to achieve its strongest yearly performance since the late 1970s.

Bullion has advanced throughout the year by several factors, such as increasing fears that national debt levels cannot be maintained.

Sanae Takaichi’s victory in Japan has further strengthened worries that leaders could seek to stimulate the economy by borrowing more and lower interest rates, and use inflation to reduce the real value of the resulting debt.

Trading Update

Tokyo’s bourse has jumped to unprecedented levels in Monday trading, with the currency dropping, following the chief role of the country’s ruling party went unexpectedly to by spending advocate Takaichi.

Expectations that Takaichi will be a pro-stimulus prime minister has sparked a rush of positive investment that has pushed the Nikkei 225 share index up by 5%, rising by more than 2300 points ending at just over 48,000.

Yet the Japanese yen is heading in the other direction – it has fallen about 2 percent against the US dollar at 150.3¥/$.

The incoming leader, who should become the first woman to lead Japan later this month, is a known fan of Thatcher. However, while she is conservative regarding social issues, Takaichi follows a contrasting path in economic policy, and has advocate higher state investment and loose monetary policy.

Consequently, markets predict to maintain the country’s drive to stimulate its economy through public investment and reduced borrowing costs, likely resulting in increased price pressures and greater borrowing.

Hence the weaker yen, with traders expecting fewer interest rates hikes from the Bank of Japan than before.

Japan’s government bond values are also down this session, driving higher the return on long-term Japanese bonds near to record highs, due to forecasts of more government loans and sustained inflationary pressures.

The markets are evaluating the degree to which Takaichi’s policies will echo the “Abenomics” programme implemented 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 the recent vote, but experts understand her fundamental position and her support of Abe’s three-pillar strategy.

Markets could then push for more information on her policies, and how much impact she could be in directing the BoJ’s policy thinking, given the October BoJ meeting is considered a key event with a quarter-point increase considered likely...

Economic Calendar

• 08:30 British Summer Time: Eurozone construction PMI for September
• 9:30 AM UK time: UK building sector data for September
• 18:30 BST: Bank of England governor Bailey to give keynote speech at Scotland’s Global Investment Summit 2025