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Investor Sentiment following Japan's Political Shift

FX analysts at leading banks have reportedly exited their recommendations for holding a bullish stance on the yen following Japan’s governing party elected Sanae Takaichi to be its chief.

In a report titled “Exiting the yen,” a global head of FX research commented:

We held a long yen position in our FX Blueprint but have closed this due to the LDP election outcome. The unexpected win by Takaichi brings back renewed unpredictability around Japan’s policy priorities and the timing of BoJ monetary tightening.

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 further cautioned evidence of political control within Japan (where the government controls monetary policy decisions) are a tail risk.

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

Bullion values are hitting fresh record highs, today, in its top-performing period since the late 1970s.

The spot price of the precious metal has climbed more than 1 percent this morning at $3,944 an ounce, as it closes in on the $4,000 per ounce level.

This indicates bullion prices has surged fifty percent since the start of January, heading for its best annual gains in over 45 years.

The metal has risen in recent months by several factors, such as growing worries that national debt levels are unsustainable.

The new leader’s election win in the party vote will only have reinforced apprehensions that government officials will attempt to stimulate the economy through higher borrowing and cheaper credit, and rely on inflation to diminish the worth of new borrowings.

Trading Update

The Japanese equity market has surged to unprecedented levels today, as the yen falls, after the top position of the LDP went unexpectedly to by stimulus supporter Takaichi.

Expectations that the new leader will be a pro-stimulus prime minister has ignited a surge of optimistic trading driving Japan’s benchmark index higher by five percent, as it gained more than 2300 points ending at just over 48,000.

But the yen is trending downward – it has fallen nearly two percent versus the dollar at 150.3¥/$.

The incoming leader, who is expected to become the first woman to lead Japan later this month, is a long-time admirer of Thatcher. But although she holds conservative views in social matters, the new leader takes an un-Thatcherite approach in economic policy, and supports a revival of government spending and accommodative central bank measures.

As such, she’s expected to maintain the country’s drive to boost economic growth via government outlays and lower interest rates, likely resulting in increased price pressures and increased borrowing.

Thus yen depreciation, as markets predict fewer interest rates hikes from the Bank of Japan relative to previous forecasts.

Japanese long-term bond prices are also down this session, lifting the yield on long-term Japanese bonds near to all-time highs, on expectations of more government loans and more persistent inflation.

Investors are evaluating the degree to which the new leader’s plans will mirror the policies of Shinzo Abe implemented by former PM Abe.

One analyst noted:

Unlike in late 2024, she has not engaged from promoting Abenomics in this LDP leadership campaign, but experts understand her core beliefs and her approval of Shinzo Abe’s three-pillar approach.

Markets could then push for more information on her policies, plus the degree of influence she might become in shaping monetary policy, given the October BoJ meeting is viewed as a potential turning point with a quarter-point increase potentially on the table...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for last month
• 09:30 BST: British construction figures for September
• 6.30pm BST: Central bank head Bailey to deliver address at an investment conference 2025