Yen Plummets while Nikkei Rises to Peak After Takaichi's Party Election Success; Gold Tops $4,000 Price Point

Financial Market Response to Japan's Ruling Party Vote

Foreign exchange experts from leading financial institutions have terminated their positions to hold a long position on Japan’s currency following Japan’s governing party chose Sanae Takaichi as its leader.

In a report titled “Exiting the yen,” a lead strategist for foreign exchange stated:

We went long JPY as part of our strategy but are now getting out due to the LDP election outcome. Takaichi’s unforeseen success reintroduces renewed unpredictability concerning Japanese economic goals as well as the schedule for the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem for Japan, but questions are mounting regarding how it will be addressed.

The analyst also warned indicators of government influence within Japan (in which politicians direct the central bank’s actions) represent a downside risk.

Gold Approaches the $4,000 Level

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

The current price of gold has climbed by over 1% today reaching $3,944/oz, as it closes in on the $4000/oz mark.

This indicates the gold price has increased fifty percent since the start of January, heading for its top annual returns in over 45 years.

Gold has been driven higher in recent months because of various drivers, such as rising concerns that national debt levels are unsustainable.

Takaichi’s election win in the party vote will only have reinforced worries that leaders could seek to stimulate the economy by borrowing more and cheaper credit, and use inflation to diminish the worth of accumulated debt.

Market Overview

The Japanese equity market has surged to an all-time peak in Monday trading, with the currency dropping, after the chief role of the LDP went unexpectedly to by fiscal dove Takaichi.

Predictions that Takaichi is likely to be a leader supporting government spending has sparked a rush of positive investment that has pushed Japan’s benchmark index to a 5% gain, rising by more than 2300 points to close at just over 48,000.

But the yen is heading downward – it’s down about 2 percent against the US dollar reaching 150.3 against the greenback.

The incoming leader, who should become the nation’s initial woman PM later this month, is a long-time admirer of Margaret Thatcher. Yet even though her social policies are right-leaning on social policy, the new leader adopts a different strategy on budget matters, and promotes a revival of government spending and accommodative central bank measures.

Therefore, she’s expected to maintain the country’s drive to boost economic growth via government outlays and reduced borrowing costs, likely resulting in higher inflation and more debt.

Hence the falling currency, with traders expecting fewer interest rates hikes in Tokyo compared to earlier expectations.

Japanese long-term bond prices have also fallen today, driving higher the yield on thirty-year bonds approaching peak levels, on expectations of more government loans and sustained inflationary pressures.

Investors are evaluating how closely the new leader’s policies will mirror the “Abenomics” programme advocated by former PM Shinzo Abe.

A brokerage head explained:

Unlike in late 2024, the leader has avoided from talking up the three-arrow strategy during the party election, but many are aware her underlying stance and her approval of the former PM’s three-pillar strategy.

Traders may therefore move for more information on that position, and how much impact she might become in shaping the central bank’s decisions, ahead of the BoJ’s next meeting is considered a “live” affair and a 25bp hike considered likely...

Economic Calendar

• 08:30 British Summer Time: European construction data for the previous month
• 9:30 AM UK time: UK construction PMI for the last month
• 18:30 BST: Central bank head Andrew Bailey to speak at Scotland’s Global Investment Summit this year