In a historic and unprecedented event, Japan turned a new page in its political history today after Sanae Takaichi won the position of Prime Minister, becoming the first woman ever to hold the country’s highest office.

Takaichi’s victory followed a decisive parliamentary vote. According to Japan’s public broadcaster NHK, she secured 237 votes in the first round, eliminating the need for a runoff in the 465-seat lower house.

Her win came after the ruling Liberal Democratic Party (LDP) formed an alliance with the Japan Innovation Party, with reports indicating that the two sides signed a coalition agreement over the weekend.

According to Reuters, Takaichi agreed to support several policies of the Japan Innovation Party, including reducing the number of parliamentary seats, providing free secondary education, and freezing the food consumption tax for two years.

Earlier this month, Takaichi had faced a major political setback following the sudden split from Komeito — the LDP’s traditional coalition partner for more than 26 years.

Takaichi, one of the closest political allies of the late Shinzo Abe, is known for supporting the stimulus-oriented policies that defined the so-called “Abenomics,” raising expectations that she will pursue an expansionary approach to boost Japan’s stock market. However, such a stance could keep the yen under persistent pressure due to the continuation of ultra-loose monetary policy.

After winning the leadership of the ruling party, Takaichi pledged to strengthen Japan’s economy through massive public spending and criticized the Bank of Japan’s decision to raise interest rates.

Market Overview

• The Japanese yen reacted negatively to Takaichi’s official rise to power, declining broadly against a basket of global currencies.

• The Nikkei index hit a new record high, approaching the 50,000-point mark for the first time in history.

The euro fell in European trading on Tuesday against a basket of global currencies, continuing to move in the negative zone for the third consecutive day against the US dollar, as investors focused on buying the American currency as the best alternative investment, while maintaining caution toward political developments in Japan and France.

With inflationary pressures once again mounting on European Central Bank policymakers, the likelihood of further interest rate cuts this year has declined. To reassess these expectations, investors are awaiting additional economic data and remarks from ECB officials.

Price Overview

• The EUR/USD exchange rate fell by about 0.1% to $1.1632, down from an opening level of $1.1641, after recording a high of $1.1655.

• The euro ended Monday’s session down 0.1% against the dollar, marking its second consecutive daily loss, as corrective activity and profit-taking continued from its two-week high at $1.1728.

US Dollar

The US Dollar Index rose by more than 0.1% on Tuesday, extending gains for the third consecutive session and reflecting continued strength of the American currency against a basket of major and minor currencies.

This rise came amid ongoing demand for the dollar as the preferred alternative investment, with investors remaining cautious about political developments in Japan ahead of a crucial parliamentary vote to select a new prime minister in the world’s fourth-largest economy.

In addition, the absence of any clear catalyst to end the US government shutdown in the coming weeks has increased the likelihood that it could extend into November, potentially triggering further risk aversion.

Political Developments in France

Although Prime Minister Sébastien Lecornu’s decision to suspend the 2023 pension reform until after the 2027 presidential elections brought some temporary calm to European markets, it did not address the underlying political crisis or reduce uncertainty surrounding future fiscal policy in the eurozone’s second-largest economy.

European Interest Rates

• Market pricing currently shows less than a 10% probability of a 25-basis-point rate cut by the European Central Bank in October.

• Traders have scaled back expectations of further monetary easing by the ECB, indicating that the current rate-cutting cycle may have ended for this year.

• To reassess these probabilities, investors are awaiting a range of economic data releases in Europe, along with upcoming remarks from ECB officials.

The Japanese yen fell in Asian trading on Tuesday against a basket of major and minor currencies, extending its losses for the third consecutive day against the US dollar, ahead of the parliamentary vote to choose a new prime minister in the world’s fourth-largest economy.

Sanae Takaichi, leader of the ruling Liberal Democratic Party, is steadily moving toward victory in the race for Japan’s premiership, which would make her the first woman in the country’s history to lead the government, after securing decisive political backing that strengthens her chances of winning the post.

Price Overview

• The USD/JPY exchange rate rose by about 0.3% to ¥151.15 from an opening level of ¥150.74, after recording a low of ¥150.47.

• The yen ended Monday’s session down 0.1% against the dollar, marking its second consecutive daily loss, as corrective moves and profit-taking continued from its two-week high at ¥149.37.

Political Developments

Kyodo News reported that the ruling Liberal Democratic Party and the Japan Innovation Party announced the formation of a formal coalition, in a strategic move aimed at securing a parliamentary majority ahead of the decisive vote to elect the new prime minister later today.

Sanae Takaichi, who is seeking to become Japan’s first female prime minister, faced a significant political setback earlier this month after the sudden withdrawal of Komeito — the Liberal Democratic Party’s traditional coalition partner for more than 26 years.

The new alliance with the Japan Innovation Party, known for its hardline right-wing positions, appears to give Takaichi strong momentum toward power, as both parties share similar views on economic and defense issues, including support for accommodative monetary policy and higher military spending to strengthen the country’s defense capabilities.

According to reports from Japan’s FNN network, Takaichi plans to appoint former Regional Revitalization Minister Satsuki Katayama as finance minister in her upcoming cabinet.

Opinions and Analysis

• Ray Attrill, Head of FX Strategy at National Australia Bank, said: “If Takaichi is confirmed as prime minister today, the next question will be about the policies she will pursue — particularly regarding monetary policy and fiscal direction — and whether the Ishin Party has set specific conditions for its alliance with the Liberal Democratic Party.”

• Attrill added that these significant political developments in Japan could open the door to notable volatility in yen movements.

Oil prices fell during Monday’s trading session, hitting their lowest levels in five months, as investors assessed the prospects of a global supply glut in addition to trade uncertainty between the United States and China.

According to estimates published by Reuters on Monday, the market is showing a shift from concerns about supply shortages to fears of oversupply, as traders adopted a behavior known as “contango” last Friday — meaning that participants are storing oil to sell it later at higher levels, based on expectations of reduced supply afterward.

Trade tensions between the United States and China remain in place after both sides imposed additional tariffs on reciprocal shipping, in steps that could disrupt global trade flows.

In trading, Brent crude futures for December delivery fell by 0.5%, or the equivalent of 28 cents, to 61.01 dollars per barrel at settlement.

US Nymex crude futures declined slightly by just two cents, closing at 57.52 dollars per barrel.