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Investor Sentiment following the Japanese Political Shift

Currency strategists at major banks have terminated their previous recommendations for holding a long position on the yen after the country’s leading political group chose Sanae Takaichi as the new chief.

In commentary named “Leaving yen positions,” one chief for currency analysis commented:

Our strategy was bullish on the yen as part of our strategy but are now getting out following the LDP election outcome. Sanae Takaichi’s surprise victory creates significant doubt regarding the nation’s policy focus and the timing of the BoJ [Bank of Japan] hiking cycle.

Experts agree that rising prices are an issue in Japan, but questions are mounting on how it will be dealt with.

The expert further cautioned evidence of political control across Japan (where state authorities influence the BoJ’s moves) pose a potential danger.

Gold Nears the $4,000 Threshold

Gold prices are hitting new all-time peaks, once more, during its best performance in over four decades.

The immediate value of gold has climbed by 1% or more today at $3,944 an ounce, nearing the $4000/oz mark.

This shows gold’s value has increased by 50% since January 1st, on track for its top annual returns in over 45 years.

The metal has risen this year by several factors, among them rising concerns that national debt levels are unsustainable.

The new leader’s success in Japan will only have reinforced worries that politicians could seek to secure growth via increased debt and lower interest rates, and rely on inflation to diminish the worth of new borrowings.

Trading Update

The Japanese equity market has rallied to an all-time peak in Monday trading, as the yen falls, after the leadership of the country’s ruling party was surprisingly won by stimulus supporter Takaichi.

Forecasts that Sanae Takaichi is likely to be a leader supporting government spending has sparked a rush of positive investment that has pushed Japan’s benchmark index higher by five percent, as it gained more than 2300 points ending at 48,085 points.

But the yen is trending downward – it has fallen almost 2% relative to the USD to 150.3 yen per dollar.

Sanae Takaichi, set to be the first woman to lead Japan later this month, has long admired of Margaret Thatcher. But although she holds conservative views regarding social issues, she follows a contrasting path on budget matters, and supports higher state investment and loose monetary policy.

Therefore, analysts anticipate to continue Japan’s push to spur activity through public investment and cheap credit, likely resulting in higher inflation and increased borrowing.

Thus yen depreciation, as markets predict reduced rate increases in Tokyo than before.

The nation’s debt securities have declined this session, lifting the interest rate on long-term Japanese bonds close to peak levels, due to forecasts of higher borrowing and more persistent inflation.

Traders will be calculating to what extent Takaichi’s policies will mirror the “Abenomics” programme implemented by former PM Shinzo Abe.

One analyst noted:

Different from previous comments, Takaichi has refrained from talking up the three-arrow strategy during the party election, but many are aware her fundamental position and her approval of Shinzo Abe’s Three Arrows strategy.

Investors might thus seek for more information regarding her stance, and how much impact she may be in directing the BoJ’s policy thinking, given the October BoJ meeting is considered a “live” affair and a 25bp hike considered likely...

Today’s Schedule

• 08:30 British Summer Time: Euro area building activity for the previous month
• 9.30am BST: UK construction PMI for September
• 6:30 PM UK time: Bank of England governor the BOE’s Andrew Bailey to deliver address at Scotland’s Global Investment Summit 2025