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Investor Sentiment to Japan's Political Shift

Foreign exchange experts from leading investment firms have terminated their previous recommendations for holding a bullish stance on Japan’s currency after Japan’s leading political group elected Sanae Takaichi to be its chief.

In commentary titled “Exiting the yen,” a global head for currency analysis stated:

We went long JPY in our FX Blueprint but are now getting out following the LDP election outcome. Sanae Takaichi’s surprise victory brings back significant doubt regarding Japanese economic goals and the timing of BoJ monetary tightening.

Analysts concur that rising prices are an issue within the Japanese economy, but uncertainty is now going up again about the approach to managing it.

The analyst also warned indicators of government influence within Japan (where the government controls monetary policy decisions) are a tail risk.

Gold Nears the $4,000 Mark

The gold price are achieving new all-time peaks, again, during its best performance since 1979.

The spot price of bullion has jumped by over 1% this morning reaching $3,944/oz, nearing the $4,000 threshold.

This indicates gold’s value has increased half again since January 1st, likely to achieve its best annual gains in over 45 years.

Gold has been driven higher throughout the year by several factors, including increasing fears that government debts may be unmanageable.

Takaichi’s victory in the Japanese election will only have reinforced concerns that leaders will attempt to stimulate the economy via increased debt and cheaper credit, and use inflation to erode the value of the resulting debt.

Trading Update

The Japanese equity market has jumped to a record high today, with the currency dropping, following the top position of the LDP was unexpectedly secured by spending advocate Sanae Takaichi.

Predictions that the new leader is likely to be a pro-stimulus prime minister has sparked a rush of positive investment driving Japan’s benchmark index to a 5% gain, as it gained 2315 points to finish at 48,085.

However, the currency is heading in the other direction – it’s down nearly two percent against the US dollar to 150.3 yen per dollar.

Sanae Takaichi, set to be the nation’s initial woman PM in the coming weeks, is a known fan of Thatcher. However, while she is conservative on social policy, the new leader takes an un-Thatcherite approach in economic policy, and has advocate a revival of government spending and accommodative central bank measures.

As such, analysts anticipate to continue the national effort to boost economic growth though fiscal spending and lower interest rates, potentially causing increased price pressures and increased borrowing.

Thus the weaker yen, as investors anticipate reduced rate increases by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices have declined in Monday trading, lifting the yield on thirty-year bonds close to peak levels, because of predictions of higher borrowing and more persistent inflation.

The markets are evaluating to what extent Sanae Takaichi’s plans will echo the policies of Shinzo Abe pushed by ex-prime minister Abe.

One analyst commented:

Unlike in late 2024, Takaichi has refrained from promoting the Abenomics program in the recent vote, but many are aware her underlying stance and her appreciation of Shinzo Abe’s three-pillar approach.

Markets could then push to gain understanding on that position, and how much impact she could be in forming the BoJ’s policy thinking, ahead of the BoJ’s next meeting is viewed as a “live” affair and a rate rise considered likely...

Today’s Schedule

• 8.30am BST: European construction data for last month
• 9:30 AM UK time: British construction figures for the last month
• 18:30 BST: BOE chief Andrew Bailey to deliver address at a financial forum this year