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Investor Sentiment to Japan's Leadership Election

Foreign exchange experts from leading investment firms have reportedly terminated their previous recommendations to hold an optimistic view regarding Japan’s currency after the country’s governing party selected Sanae Takaichi as its leader.

In a note named “Getting out of the yen,” one chief for foreign exchange explained:

We held a long yen position within our portfolio but have now exited due to the weekend’s election result. Takaichi’s unforeseen success creates significant doubt concerning the nation’s policy focus and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that rising prices are an issue for Japan, but doubts are resurfacing regarding how it will be addressed.

The strategist also warned indicators of government influence across Japan (where state authorities influence monetary policy decisions) pose a potential danger.

Gold Nears $4,000 per ounce Threshold

The gold price are achieving fresh record highs, again, in its strongest year since the late 1970s.

The immediate value of bullion has surged by over 1% this morning to $3,944 per ounce, nearing the $4,000 per ounce level.

This indicates gold’s value has surged by 50% since January 1st, heading for its best annual gains since the Iranian Revolution.

Gold has been driven higher throughout the year because of various drivers, among them rising concerns that public borrowing may be unmanageable.

Sanae Takaichi’s election win in the party vote has further strengthened worries that politicians will attempt to boost output through higher borrowing and cheaper credit, and depend on rising prices to erode the value of accumulated debt.

Trading Update

Tokyo’s bourse has jumped to a record high today, with the currency dropping, following the chief role of the governing party was surprisingly won by fiscal dove Takaichi.

Predictions that Takaichi is likely to be a leader supporting government spending has sparked a surge of optimistic trading lifting the Tokyo stock index to a 5% gain, adding over 2300 points to finish at 48,085 points.

But the yen is very much moving in the other direction – it dropped almost 2% against the US dollar at 150.3¥/$.

Takaichi, who should become the first woman to lead Japan later this month, is a known fan of Margaret Thatcher. However, while she is conservative regarding social issues, she takes an un-Thatcherite approach in economic policy, and promotes higher state investment and accommodative central bank measures.

Consequently, markets predict to maintain the national effort to spur activity through public investment and reduced borrowing costs, likely resulting in higher inflation and greater borrowing.

As a result yen depreciation, as markets predict fewer interest rates hikes in Tokyo relative to previous forecasts.

Japan’s government bond values have declined this session, lifting the interest rate on its 30-year debt approaching all-time highs, because of predictions of higher borrowing and sustained inflationary pressures.

Traders will be calculating how closely the new leader’s plans will mirror the Abenomics strategy implemented by previous leader Abe.

One analyst explained:

Unlike in late 2024, Takaichi has refrained from talking up the three-arrow strategy in the recent vote, but many are aware her underlying stance and her support of the former PM’s Three Arrows strategy.

Markets could then push to gain understanding on that position, plus the degree of influence she might become in forming monetary policy, ahead of the BoJ’s next meeting is seen as a “live” affair and a rate rise considered likely...

Market Agenda

• 08:30 British Summer Time: Eurozone construction PMI for September
• 9:30 AM UK time: UK construction PMI for the last month
• 18:30 BST: Bank of England governor the BOE’s Andrew Bailey to speak at an investment conference this year