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Market Reactions following the Japanese Political Shift

Foreign exchange experts from prominent banks have reportedly closed their strategies to hold a long position on the Japanese yen following Japan’s ruling party chose Sanae Takaichi to be its leader.

In a report called “Leaving yen positions,” a global head of FX research explained:

We went long JPY in our FX Blueprint but are now getting out after the party leadership vote. Sanae Takaichi’s surprise victory brings back too much uncertainty around the nation’s policy focus and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem within the Japanese economy, but questions are mounting regarding how it will be addressed.

The strategist further cautioned evidence of political control within Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Closes In On the $4,000 Mark

The gold price are reaching new all-time peaks, again, during its best performance since 1979.

The immediate value of gold has climbed by 1% or more today to $3,944 per ounce, as it closes in on the $4,000 threshold.

This shows bullion prices has increased fifty percent since January 1st, on track for its best annual gains since the late 1970s.

Gold has been driven higher throughout the year by several factors, among them growing worries that government debts are unsustainable.

Takaichi’s victory in the party vote has further strengthened apprehensions that government officials will attempt to stimulate the economy by borrowing more and reduced rates, and depend on rising prices to erode the value of the resulting debt.

Market Overview

Tokyo’s bourse has surged to unprecedented levels this morning, while the yen is plunging, after the chief role of the LDP went unexpectedly to by stimulus supporter Takaichi.

Forecasts that the new leader will become a leader supporting government spending has sparked a wave of enthusiastic buying lifting Japan’s benchmark index up by 5%, rising by more than 2300 points to close at just over 48,000.

However, the currency is very much moving downward – it dropped almost 2% relative to the USD reaching 150.3 against the greenback.

The incoming leader, who is expected to become the first woman to lead Japan later this month, is a long-time admirer of the former UK leader. However, while she is conservative in social matters, the new leader adopts a different strategy on budget matters, and promotes a revival of government spending and easy money policies.

Therefore, she’s expected to continue the country’s drive to stimulate its economy though fiscal spending and reduced borrowing costs, potentially causing increased price pressures and more debt.

As a result yen depreciation, as investors anticipate fewer interest rates hikes by Japanese authorities than before.

The nation’s debt securities have also fallen in Monday trading, lifting the return on its 30-year debt approaching all-time highs, due to forecasts of higher borrowing and lasting price increases.

The markets are assessing to what extent Takaichi’s policies will mirror the policies of Shinzo Abe advocated by previous leader Shinzo Abe.

A brokerage head noted:

Unlike in late 2024, the leader has avoided from talking up the three-arrow strategy in the recent vote, but many are aware her fundamental position and her appreciation of Shinzo Abe’s three-pillar philosophy.

Investors might thus seek to gain understanding on that position, plus the degree of influence she may be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is considered a “live” affair and a rate rise potentially on the table...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for last month
• 9.30am BST: UK building sector data for the last month
• 6.30pm BST: Bank of England governor Andrew Bailey to speak at a financial forum 2025