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Market Reactions to Japan's Ruling Party Vote

Currency strategists from major banks have terminated their recommendations for holding an optimistic view regarding Japan’s currency following the country’s ruling party elected Takaichi to be its chief.

In commentary named “Leaving yen positions,” a lead strategist for currency analysis stated:

We went long JPY within our portfolio but have closed this following the party leadership vote. Takaichi’s unforeseen success brings back too much uncertainty concerning Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem within the Japanese economy, but questions are mounting on how it will be dealt with.

The expert additionally noted that signs of fiscal dominance in Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Approaches the $4,000/oz Level

Gold prices are reaching fresh record highs, today, in its top-performing period since the late 1970s.

The immediate value of gold has jumped more than 1 percent this morning to $3,944 per ounce, as it closes in on the $4000/oz mark.

This shows the gold price has increased half again since the start of January, likely to achieve its strongest yearly performance since the late 1970s.

The metal has risen in recent months because of various drivers, including rising concerns that public borrowing may be unmanageable.

Takaichi’s victory in Japan has further strengthened concerns that leaders may try to boost output through higher borrowing and cheaper credit, and use inflation to erode the value of new borrowings.

Market Overview

Tokyo’s bourse has rallied to unprecedented levels this morning, with the currency dropping, following the top position of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Predictions that the new leader will be a PM favoring economic stimulus has ignited a surge of optimistic trading lifting the Tokyo stock index higher by five percent, adding more than 2300 points to close at 48,085 points.

However, the currency is trending the opposite way – it has fallen about 2 percent versus the dollar reaching 150.3 against the greenback.

Sanae Takaichi, set to be the first woman to lead Japan in the coming weeks, is a known fan of Thatcher. However, while she is conservative on social policy, she follows a contrasting path on budget matters, and supports increased public expenditure and easy money policies.

As such, markets predict to continue the national effort to boost economic growth though fiscal spending and reduced borrowing costs, which would lead to increased price pressures and increased borrowing.

Hence the weaker yen, as markets predict less monetary tightening by Japanese authorities than before.

Japanese long-term bond prices have also fallen today, lifting the interest rate on its 30-year debt approaching peak levels, on expectations of increased debt issuance and more persistent inflation.

The markets are evaluating to what extent Sanae Takaichi’s proposals will mirror the “Abenomics” programme advocated by ex-prime minister Abe.

One analyst noted:

Different from previous comments, she has not engaged from highlighting Abenomics in this LDP leadership campaign, but most know her underlying stance and her support of the former PM’s three-arrow strategy.

Markets could then push to obtain clarity on her policies, plus the degree of influence she may be in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is considered a key event and a 25bp hike considered likely...

Market Agenda

• 8:30 AM UK time: Euro area building activity for last month
• 9.30am BST: UK construction PMI for September
• 6.30pm BST: BOE chief the BOE’s Andrew Bailey to speak at a financial forum 2025