Japanese Currency Falls while Nikkei Jumps to All-Time High After Sanae Takaichi’s Party Election Success; Gold Tops $4,000 Level

Market Reactions following Japan's Leadership Election

Currency strategists at leading banks have terminated their recommendations to hold a bullish stance on the yen following the country’s ruling party elected Sanae Takaichi as its head.

In a report titled “Exiting the yen,” one chief of FX research commented:

We went long JPY as part of our strategy but have now exited after the LDP election outcome. Takaichi’s unforeseen success brings back too much uncertainty around Japan’s policy priorities and the expected date of interest rate increases by the Bank of Japan.

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

The strategist additionally noted evidence of political control in Japan (where the government controls monetary policy decisions) represent a downside risk.

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

The gold price are hitting unprecedented levels, today, in its strongest year since the late 1970s.

The spot price of gold has climbed by 1% or more in recent trading at $3,944 an ounce, as it closes in on the $4000/oz mark.

This means bullion prices has surged half again from the beginning of the year, likely to achieve its top annual returns in over 45 years.

The metal has risen throughout the year by several factors, such as increasing fears that government debts cannot be maintained.

Takaichi’s success in Japan is likely amplifying worries that government officials could seek to stimulate the economy 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 unprecedented levels this morning, as the yen falls, following the top position of the governing party was surprisingly won by stimulus supporter Sanae Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has sparked a rush of positive investment that has pushed the Nikkei 225 share index to a 5% gain, rising by 2315 points to finish at 48,085.

But the yen is very much moving downward – it’s down almost 2% against the US dollar reaching 150.3 against the greenback.

Takaichi, set to be the nation’s initial woman PM in the coming weeks, is a long-time admirer of Margaret Thatcher. Yet even though her social policies are right-leaning on social policy, Takaichi adopts a different strategy in economic policy, and has advocate increased public expenditure and loose monetary policy.

As such, analysts anticipate to continue the national effort to boost economic growth via government outlays and reduced borrowing costs, which would lead to higher inflation and more debt.

Hence the weaker yen, as markets predict less monetary tightening in Tokyo compared to earlier expectations.

The nation’s debt securities are also down in Monday trading, driving higher the interest rate on long-term Japanese bonds approaching peak levels, due to forecasts of more government loans and lasting price increases.

Traders will be calculating how closely Takaichi’s plans will mirror the “Abenomics” programme advocated by previous leader Shinzo Abe.

One analyst explained:

Unlike in late 2024, she has not engaged from highlighting the three-arrow strategy during the party election, but experts understand her underlying stance and her appreciation of the former PM’s three-arrow approach.

Traders may therefore move to gain understanding regarding her stance, as well as exactly how influential she could be in forming the central bank’s decisions, with the Bank of Japan’s October session is seen as a potential turning point and a 25bp hike potentially on the table...

Today’s Schedule

• 8:30 AM UK time: Eurozone construction PMI for September
• 9.30am BST: British construction figures for September
• 6.30pm BST: Central bank head Andrew Bailey to give keynote speech at an investment conference this year