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Market Reactions to Japan's Ruling Party Vote

FX analysts at major banks have terminated their previous strategies to hold an optimistic view on Japan’s currency after Japan’s leading political group elected Takaichi as its head.

In commentary called “Exiting the yen,” a chief for currency analysis explained:

We held a long yen position as part of our strategy but have closed this following the LDP election outcome. The unexpected win by Takaichi brings back renewed unpredictability around Japan’s policy priorities and the timing of BoJ monetary tightening.

Experts agree that rising prices are an issue for Japan, but uncertainty is now going up again on how it will be dealt with.

The expert further cautioned that signs of fiscal dominance within Japan (in which politicians direct monetary policy decisions) pose a potential danger.

Gold Nears $4,000 per ounce Mark

Bullion values are achieving fresh record highs, again, during its best performance since the late 1970s.

The immediate value of the precious metal has jumped more than 1 percent in recent trading reaching $3,944/oz, nearing the $4,000 threshold.

This means bullion prices has increased fifty percent since January 1st, likely to achieve its strongest yearly performance since the Iranian Revolution.

Gold has been driven higher in recent months because of various drivers, including increasing fears that public borrowing are unsustainable.

The new leader’s election win in the Japanese election will only have reinforced apprehensions that leaders could seek to secure growth by borrowing more and reduced rates, and rely on inflation to erode the value of the resulting debt.

Trading Update

The Japanese equity market has jumped to an all-time peak this morning, while the yen is plunging, after the chief role of the country’s ruling party was unexpectedly secured by stimulus supporter Takaichi.

Predictions that Takaichi will become a leader supporting government spending has sparked a surge of optimistic trading lifting Japan’s benchmark index up by 5%, adding over 2300 points to finish at 48,085.

But the yen is trending in the other direction – it dropped nearly two percent relative to the USD at 150.3¥/$.

Takaichi, set to be Japan’s first female prime minister later this month, is a known fan of the former UK leader. However, while her social policies are right-leaning in social matters, she follows a contrasting path in economic policy, and has advocate a revival of government spending and easy money policies.

Therefore, analysts anticipate to maintain the country’s drive to boost economic growth though fiscal spending and reduced borrowing costs, which would lead to increased price pressures and greater borrowing.

Hence the weaker yen, as markets predict reduced rate increases by Japanese authorities than before.

Japan’s government bond values have declined today, driving higher the interest rate on long-term Japanese bonds approaching record highs, due to forecasts of higher borrowing and sustained inflationary pressures.

The markets will be calculating the degree to which the new leader’s proposals will resemble the Abenomics strategy pushed by ex-prime minister Shinzo Abe.

A brokerage head explained:

Unlike in late 2024, the leader has avoided from promoting Abenomics during the party election, but experts understand her core beliefs and her appreciation of the former PM’s Three Arrows approach.

Investors might thus seek to gain understanding on her policies, and how much impact she may be in directing monetary policy, ahead of the BoJ’s next meeting is seen as a “live” affair and a rate rise potentially on the table...

Economic Calendar

• 8:30 AM UK time: European construction data for last month
• 9.30am BST: British construction figures for the last month
• 6.30pm BST: Bank of England governor Bailey to deliver address at Scotland’s Global Investment Summit this year