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Market Reactions following Japan's Leadership Election

Currency strategists at prominent financial institutions have exited their recommendations to hold an optimistic view on the Japanese yen after the country’s governing party chose Takaichi as the new leader.

In commentary named “Exiting the yen,” a lead strategist for currency analysis explained:

We went long JPY within our portfolio but are now getting out due to the LDP election outcome. Sanae Takaichi’s surprise victory reintroduces too much uncertainty regarding the nation’s policy focus as well as the schedule for interest rate increases by the Bank of Japan.

Analysts concur that inflationary pressures exist for Japan, but doubts are resurfacing about the approach to managing it.

The expert also warned evidence of political control within Japan (in which politicians direct monetary policy decisions) represent a downside risk.

Gold Nears the $4,000 Level

Bullion values are reaching unprecedented levels, again, in its top-performing period in over four decades.

The current price of gold has jumped more than 1 percent today reaching $3,944/oz, as it closes in on the $4000/oz mark.

This means bullion prices has jumped fifty percent from the beginning of the year, on track for its top annual returns since the Iranian Revolution.

Gold has been driven higher this year due to multiple reasons, such as growing worries that government debts may be unmanageable.

Takaichi’s success in the Japanese election is likely amplifying concerns that leaders may try to secure growth through higher borrowing and cheaper credit, and depend on rising prices to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has rallied to unprecedented levels today, with the currency dropping, following the top position of the governing party was surprisingly won by stimulus supporter Takaichi.

Predictions that Sanae Takaichi will become a PM favoring economic stimulus has sparked a surge of optimistic trading driving Japan’s benchmark index to a 5% gain, as it gained 2315 points to finish at 48,085 points.

However, the currency is very much moving the opposite way – it’s down almost 2% versus the dollar reaching 150.3 against the greenback.

The incoming leader, set to be Japan’s first female prime minister later this month, is a known fan of Thatcher. But although she is conservative on social policy, Takaichi takes an un-Thatcherite approach in economic policy, and supports a revival of government spending and loose monetary policy.

Consequently, markets predict to continue the country’s drive to boost economic growth though fiscal spending and reduced borrowing costs, potentially causing higher inflation and increased borrowing.

Thus the falling currency, as markets predict less monetary tightening from the Bank of Japan than before.

The nation’s debt securities have declined this session, pushing up the interest rate on its 30-year debt close to all-time highs, on expectations of more government loans and sustained inflationary pressures.

Investors will be calculating to what extent Takaichi’s plans will mirror the Abenomics strategy pushed by ex-prime minister Abe.

A brokerage head explained:

Unlike in late 2024, Takaichi has refrained from promoting the three-arrow strategy during the party election, but many are aware her fundamental position and her support of the former PM’s three-arrow strategy.

Investors might thus seek to gain understanding on that position, plus the degree of influence she could be in shaping monetary policy, ahead of the BoJ’s next meeting is seen as a “live” affair with a quarter-point increase potentially on the table...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for September
• 09:30 BST: UK building sector data for the last month
• 6.30pm BST: Central bank head the BOE’s Andrew Bailey to speak at Scotland’s Global Investment Summit 2025