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Investor Sentiment to Japan's Leadership Election

Foreign exchange experts at leading financial institutions have reportedly exited their recommendations to hold a long position regarding the Japanese yen following the country’s governing party selected Sanae Takaichi as the new chief.

In commentary titled “Leaving yen positions,” a chief for currency analysis explained:

We went long JPY as part of our strategy but have now exited due to the party leadership vote. The unexpected win by Takaichi creates renewed unpredictability regarding Japan’s policy priorities as well as the schedule for interest rate increases by the Bank of Japan.

There is agreement that inflation is a problem within the Japanese economy, but doubts are resurfacing regarding how it will be addressed.

The expert further cautioned evidence of political control within Japan (where the government controls monetary policy decisions) pose a potential danger.

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

Bullion values are reaching new all-time peaks, once more, during its best performance in over four decades.

The current price of gold has jumped by 1% or more this morning to $3,944 per ounce, approaching the $4,000 per ounce level.

This shows gold’s value has increased half again from the beginning of the year, on track for its best annual gains in over 45 years.

Bullion has advanced this year due to multiple reasons, such as rising concerns that national debt levels cannot be maintained.

The new leader’s victory in the party vote is likely amplifying concerns that leaders could seek to boost output through higher borrowing and lower interest rates, and rely on inflation to reduce the real value of accumulated debt.

Market Overview

Tokyo’s bourse has rallied to an all-time peak this morning, with the currency dropping, after the leadership of the governing party went unexpectedly to by fiscal dove Sanae Takaichi.

Predictions that the new leader will be a pro-stimulus prime minister has ignited a rush of positive investment that has pushed Japan’s benchmark index higher by five percent, adding more than 2300 points ending at 48,085.

Yet the Japanese yen is very much moving downward – it dropped nearly two percent versus the dollar reaching 150.3 against the greenback.

Takaichi, who is expected to become the nation’s initial woman PM in the coming weeks, has long admired of Thatcher. However, while she holds conservative views in social matters, the new leader adopts a different strategy on budget matters, and supports higher state investment and easy money policies.

Therefore, analysts anticipate to continue the national effort to stimulate its economy through public investment and cheap credit, potentially causing increased price pressures and more debt.

Hence the weaker yen, with traders expecting less monetary tightening in Tokyo compared to earlier expectations.

Japanese long-term bond prices have also fallen today, lifting the return on thirty-year bonds close to record highs, due to forecasts of higher borrowing and sustained inflationary pressures.

Traders are assessing the degree to which Sanae Takaichi’s plans will resemble the “Abenomics” programme advocated by former PM Shinzo Abe.

One analyst noted:

Unlike in late 2024, she has not engaged from promoting Abenomics in this LDP leadership campaign, but experts understand her underlying stance and her approval of the former PM’s three-pillar strategy.

Investors might thus seek to gain understanding regarding her stance, and how much impact she may be in shaping the central bank’s decisions, with the Bank of Japan’s October session is seen as a key event and a 25bp hike potentially on the table...

Market Agenda

• 08:30 British Summer Time: Euro area building activity for September
• 9:30 AM UK time: UK construction PMI for September
• 18:30 BST: Bank of England governor Andrew Bailey to speak at Scotland’s Global Investment Summit 2025