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Market Reactions following Japan's Leadership Election

FX analysts from major investment firms have reportedly exited their positions to hold a long position regarding the yen following the country’s ruling party chose Sanae Takaichi as the new head.

In commentary called “Getting out of the yen,” a chief of FX research explained:

We went long JPY as part of our strategy but have now exited after the LDP election outcome. Sanae Takaichi’s surprise victory reintroduces significant doubt around Japanese economic goals as well as the schedule for BoJ monetary tightening.

There is agreement that inflation is a problem for Japan, but doubts are resurfacing regarding how it will be addressed.

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

Gold Approaches the $4,000/oz Level

The gold price are reaching fresh record highs, today, during its best performance since 1979.

The immediate value of gold has climbed more than 1 percent in recent trading at $3,944 an ounce, approaching the $4000/oz mark.

This means the gold price has jumped by 50% from the beginning of the year, on track for its best annual gains in over 45 years.

Bullion has advanced this year by several factors, such as growing worries that national debt levels may be unmanageable.

The new leader’s success in Japan is likely amplifying worries that leaders will attempt to stimulate the economy by borrowing more and reduced rates, and use inflation to diminish the worth of accumulated debt.

Financial Summary

The Japanese equity market has surged to an all-time peak this morning, with the currency dropping, after the top position of the LDP was surprisingly won by spending advocate Sanae Takaichi.

Expectations that Sanae Takaichi is likely to be a pro-stimulus prime minister has ignited a rush of positive investment lifting Japan’s benchmark index up by 5%, rising by more than 2300 points to close at just over 48,000.

Yet the Japanese yen is heading downward – it’s down nearly two percent versus the dollar to 150.3 yen per dollar.

The incoming leader, who is expected to become the nation’s initial woman PM later this month, is a known fan of Thatcher. But although her social policies are right-leaning in social matters, Takaichi adopts a different strategy to fiscal policy, and has advocate a revival of government spending and accommodative central bank measures.

As such, markets predict to persist with the national effort to spur activity via government outlays and lower interest rates, which would lead to higher inflation and increased borrowing.

Thus the weaker yen, with traders expecting reduced rate increases by Japanese authorities compared to earlier expectations.

The nation’s debt securities have also fallen today, driving higher the yield on long-term Japanese bonds near to all-time highs, because of predictions of more government loans and sustained inflationary pressures.

The markets are evaluating to what extent Takaichi’s proposals will echo the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

A brokerage head explained:

Unlike in late 2024, Takaichi has refrained from talking up Abenomics in the recent vote, but many are aware her core beliefs and her support of Shinzo Abe’s Three Arrows philosophy.

Markets could then push for more information regarding her stance, and how much impact she may be in forming monetary policy, given the October BoJ meeting is viewed as a key event with a quarter-point increase considered likely...

Market Agenda

• 8.30am BST: Eurozone construction PMI for the previous month
• 9.30am BST: British construction figures for September
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to deliver address at a financial forum 2025