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Investor Sentiment to Japan's Ruling Party Vote

Currency strategists at major banks have reportedly exited their previous strategies to hold an optimistic view regarding the Japanese yen following Japan’s governing party selected Sanae Takaichi as its leader.

In a report named “Leaving yen positions,” a global head of FX research commented:

We went long JPY as part of our strategy but have closed this due to the LDP election outcome. The unexpected win by Takaichi reintroduces too much uncertainty around Japanese economic goals and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue in Japan, but doubts are resurfacing about the approach to managing it.

The strategist also warned that signs of fiscal dominance across Japan (where state authorities influence the BoJ’s moves) are a tail risk.

Gold Nears the $4,000/oz Threshold

Bullion values are hitting new all-time peaks, today, in its strongest year in over four decades.

The current price of bullion has climbed by 1% or more this morning reaching $3,944/oz, approaching the $4000/oz mark.

This indicates gold’s value has increased half again from the beginning of the year, likely to achieve its top annual returns since the Iranian Revolution.

Bullion has advanced in recent months by several factors, including growing worries that national debt levels are unsustainable.

Takaichi’s victory in the party vote is likely amplifying worries that leaders may try to secure growth by borrowing more and reduced rates, and rely on inflation to diminish the worth of accumulated debt.

Market Overview

Japan’s stock market has jumped to a record high this morning, as the yen falls, after the chief role of the governing party was unexpectedly secured by spending advocate Sanae Takaichi.

Forecasts that Takaichi will be a pro-stimulus prime minister has triggered a rush of positive investment driving Japan’s benchmark index up by 5%, as it gained over 2300 points to close at just over 48,000.

However, the currency is heading the opposite way – it has fallen nearly two percent versus the dollar reaching 150.3 against the greenback.

The incoming leader, who should become the first woman to lead Japan soon, is a known fan of Margaret Thatcher. However, while she is conservative regarding social issues, the new leader takes an un-Thatcherite approach to fiscal policy, and promotes higher state investment and accommodative central bank measures.

Therefore, analysts anticipate to maintain Japan’s push to spur activity through public investment and cheap credit, which would lead to increased price pressures and more debt.

Thus yen depreciation, as markets predict reduced rate increases from the Bank of Japan than before.

Japan’s government bond values have declined today, driving higher the return on long-term Japanese bonds close to peak levels, because of predictions of increased debt issuance and more persistent inflation.

Traders are assessing the degree to which Sanae Takaichi’s policies will resemble the policies of Shinzo Abe advocated by previous leader Shinzo Abe.

A market expert explained:

Unlike in late 2024, she has not engaged from talking up Abenomics in the recent vote, but many are aware her core beliefs and her appreciation of Shinzo Abe’s Three Arrows strategy.

Markets could then push to gain understanding regarding her stance, and how much impact she might become in directing monetary policy, given the October BoJ meeting is seen as a potential turning point and a rate rise potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for last month
• 9.30am BST: UK construction PMI for September
• 18:30 BST: Bank of England governor Andrew Bailey to deliver address at an investment conference this year