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Investor Sentiment to the Japanese Leadership Election

Currency strategists from prominent financial institutions have exited their recommendations to hold a bullish stance regarding the yen following the country’s leading political group elected Sanae Takaichi as its head.

In commentary titled “Leaving yen positions,” one lead strategist for foreign exchange commented:

We went long JPY in our FX Blueprint but have now exited due to the party leadership vote. The unexpected win by Takaichi reintroduces significant doubt regarding the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that inflation is a problem within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The strategist also warned that signs of fiscal dominance within Japan (where state authorities influence monetary policy decisions) are a tail risk.

Gold Closes In On the $4,000 Mark

Bullion values are achieving new all-time peaks, again, during its best performance since 1979.

The immediate value of gold has climbed by over 1% today to $3,944 per ounce, nearing the $4000/oz mark.

This indicates the gold price has increased half again since the start of January, on track for its top annual returns in over 45 years.

Gold has been driven higher this year because of various drivers, such as increasing fears that government debts are unsustainable.

Takaichi’s election win in the Japanese election will only have reinforced concerns that leaders may try to stimulate the economy through higher borrowing and lower interest rates, and rely on inflation to erode the value of new borrowings.

Trading Update

Japan’s stock market has jumped to an all-time peak in Monday trading, with the currency dropping, after the chief role of the country’s ruling party was surprisingly won by stimulus supporter Takaichi.

Predictions that Sanae Takaichi will be a leader supporting government spending has triggered a rush of positive investment that has pushed Japan’s benchmark index up by 5%, rising by 2315 points to close at 48,085 points.

Yet the Japanese yen is heading downward – it has fallen nearly two percent relative to the USD reaching 150.3 against the greenback.

Takaichi, set to be Japan’s first female prime minister later this month, is a known fan of Thatcher. Yet even though her social policies are right-leaning in social matters, she follows a contrasting path on budget matters, and supports higher state investment and accommodative central bank measures.

Consequently, analysts anticipate to maintain the national effort to boost economic growth though fiscal spending and lower interest rates, which would lead to higher inflation and greater borrowing.

As a result the weaker yen, with traders expecting reduced rate increases by Japanese authorities relative to previous forecasts.

The nation’s debt securities are also down in Monday trading, lifting the return on long-term Japanese bonds near to peak levels, because of predictions of higher borrowing and more persistent inflation.

Investors are assessing to what extent Takaichi’s policies will echo the “Abenomics” programme pushed by ex-prime minister Abe.

One analyst commented:

Unlike in late 2024, the leader has avoided from highlighting the three-arrow strategy during the party election, but many are aware her core beliefs and her appreciation of the former PM’s three-pillar strategy.

Markets could then push for more information regarding her stance, and how much impact she might become in forming monetary policy, ahead of the BoJ’s next meeting is seen as a “live” affair with a quarter-point increase considered likely...

Today’s Schedule

• 8.30am BST: European construction data for the previous month
• 9.30am BST: UK construction PMI for the last month
• 6:30 PM UK time: Bank of England governor Andrew Bailey to speak at a financial forum 2025