Oluwole Olawepo
The yen weakens as Japan’s new prime minister signals aggressive stimulus: investors reassess safe-haven flows and global FX volatility.
Markets reeled last week, Monday, as the Japanese yen plunged nearly 1.9%, marking its biggest one-day drop in months, following the election of pro-stimulus leader Sanae Takaichi at the helm of the ruling party.
Japanese equities surged in response, while bond yields climbed on concerns over higher debt issuance.
Globally, investors are reassessing safe-haven flows, with gold and selected currencies set to benefit. The dollar remains under pressure ahead of key U.S. inflation and labour data, providing critical tests for rate expectations. This week’s FX narrative will pivot on Japan’s policy signals, BoJ posture, and whether the yen’s decline extends or reverses under intervention risks.
Market Overview
Equities
After Sanae Takaichi was elected Japan’s party leader, Japan’s equities exploded upward: the Nikkei climbed ~4.75% on Monday alone, hitting record highs. Optimism around her likely fiscal stimulus policies and dovish monetary bias fuelled buying across industrials, tech, and defence sectors. Elsewhere globally, equity markets were mixed: risk appetite held in the U.S. and parts of Europe, but softness in emerging markets persisted as caution returned around interest rate trajectories and FX volatility.
Bonds
Japanese government bonds saw sharp yield volatility. Long-end yields jumped as markets priced in increased government issuance to fund stimulus, while two-year yields softened in anticipation of policy inaction. Meanwhile, U.S. Treasuries held steady: bond markets remain sensitive to the interplay of dovish Fed expectations and global capital flows. Safe-haven flows also bolstered demand in core sovereign debt, especially as global uncertainties build.
Commodities
Gold continues to shine in the risk-off environment. With the dollar under pressure, safe-haven demand pushed gold higher. Silver has held up, though it remains more volatile and tied to industrial demand. Oil markets were quieter: Brent and WTI traded in a sideways band, as demand concerns (especially from China) counterbalanced supply risks. Industrial metals showed mixed patterns, with weakness in demand-sensitive segments offset by strength in base metals, benefiting from stimulus expectations in Japan and other nations.
Key Themes Driving FX
Markets continue to price in U.S. Fed rate cuts over the coming months, and global FX sentiment leans dovish, putting pressure on the dollar. That said, political risk is front and centre: as the yen plummets following Japan’s leadership change, Tokyo is warning it will monitor “disorderly moves” in FX markets.
Such commentary raises intervention risk, which could act as a reaction force against free falls. Meanwhile, U.S. political dynamics and fiscal impasses (e.g., U.S. government partial shutdowns or debt ceiling tensions) also threaten to complicate the dollar’s path. Together, dovish Fed bets and rising policy uncertainty mean the dollar’s journey remains fragile and reactive.
Central bank reserve managers are accelerating diversification away from the dollar into gold and alternative currencies. Recent central bank gold purchases are underlining the shift; in 2025, these flows are seen as part of a structural repositioning of reserves. Analysts suggest this trend may outlast short-term cycles, gradually eroding dollar dominance.
Amid policy uncertainty and FX volatility, gold and other real assets are drawing strong capital flows. Precious metals have surged on central bank demand and weakening dollar support.
At the same time, the yen’s sharp decline is fuelling safe-haven rotation, yet authorities are signalling readiness to step in if the slide becomes too steep (e.g., toward ¥160 per dollar).
This dual dynamic: gold strength and yen instability will frame much of FX movement this week.
Macro Insight / News to Watch
Monday, October 13
U.S. Federal Holiday – Columbus Day: Federal offices and most banks are closed, leading to a 24-hour pause in ACH and wire payments. While digital banking and ATMs remain operational, delays in payroll and bill payments are possible.
Tuesday, October 14
Belgium Nationwide Strike: Major unions are protesting pension and labour reforms, causing significant disruptions in air travel, public transport, and municipal services.
Wednesday, October 15
U.S. Real Earnings Report (September): This report provides insights into wage growth and inflation-adjusted earnings, crucial for assessing consumer purchasing power amid economic uncertainties.
Thursday, October 16
U.S. Retail Sales (September): A key indicator of consumer spending, which constitutes a significant portion of GDP. A stronger-than-expected report could signal resilience in the economy.
Friday, October 17
U.S. Housing Market Data: Releases include Housing Starts, Building Permits, and Import Prices. These metrics offer insights into the housing sector’s health and potential inflationary pressures.
Note: Due to the U.S. government partial shutdown, the release of the September Consumer Price Index (CPI) report has been delayed to October 24
Why These Events Matter
This week’s calendar features events that could significantly influence market sentiment, risk appetite, and economic forecasts.
Monday’s U.S. Federal Holiday (Columbus Day) creates a temporary pause in banking activity. While markets are not fully closed, payment delays and low liquidity could amplify volatility in certain assets, especially in short-term forex and fixed-income markets.
Tuesday’s nationwide strike in Belgium is important for Europe-focused investors. Transportation and labour disruptions can affect business operations, supply chains, and energy demand, which in turn may influence European equities and commodity prices.
Wednesday’s U.S. Real Earnings report offers insight into wage growth relative to inflation. Rising real wages indicate stronger consumer purchasing power, which supports retail and service sectors, while declining earnings can signal potential consumer caution and reduced spending.
Thursday’s Retail Sales data is a core measure of U.S. consumer demand, forming a key input for GDP calculations. Strong retail activity can reinforce expectations of economic resilience, whereas weak sales may raise concerns about slowing growth and prompt central bank attention.
Friday’s Housing Market data, including Housing Starts and Building Permits, provides a lens into construction activity, interest rate sensitivity, and inflation pressures. Housing trends often influence both monetary policy expectations and broader economic forecasts.
Finally, the CPI report delay introduces uncertainty in inflation monitoring, potentially affecting trader positioning, bond yields, and the USD.
Markets Brace for Fiscal Easing and Policy Uncertainty
The Japanese yen has experienced a significant decline following the election of Sanae Takaichi as the leader of Japan’s ruling Liberal Democratic Party (LDP). This development positions her to become Japan’s first female prime minister. Markets reacted swiftly, with the yen dropping to a two-month low of ¥150.62 per dollar and a record low of ¥176.35 per euro
Takaichi’s economic platform, often referred to as “New Abenomics” or “Sanaenomics,” emphasizes aggressive fiscal stimulus, including substantial government spending on strategic sectors such as artificial intelligence, semiconductors, and defense.
This approach aims to stimulate domestic demand and offset inflation risks. Economist Takuji Aida, advising Takaichi’s policy circle, asserts that a weaker yen, within the range of ¥140–¥150 per dollar, can benefit Japan’s economy by encouraging domestic manufacturing and boosting capital investment.
However, the yen’s depreciation raises concerns about rising import costs, which could strain household consumption and potentially lead to higher inflation. Japanese Finance Minister Katsunobu Kato has expressed concern over the rapid and one-sided movements in the foreign exchange market, emphasizing the importance of stable currency movements aligned with economic fundamentals.
The Bank of Japan (BOJ) faces pressure to align its monetary policy with the government’s fiscal stance. While some advisers suggest a cautious approach to further rate hikes, others believe that a moderate decline in the yen is acceptable during a recovery phase.
Former BOJ officials have indicated that Japan may intervene if the yen approaches ¥160 per dollar.
In summary, Japan’s political shift towards fiscal expansion under Takaichi has led to a weaker yen, prompting a re-evaluation of safe-haven flows and increasing global foreign exchange volatility. Investors are closely monitoring the interplay between fiscal policies and monetary responses to assess the potential impact on Japan’s economic stability and currency strength.
Closing Summary
Japan’s leadership shift under Sanae Takaichi is driving a weaker yen amid expectations of aggressive fiscal stimulus, raising FX volatility and testing safe-haven flows. In the U.S., earnings, retail sales, and housing data will provide fresh insight into consumer demand and economic resilience, while delayed CPI releases add uncertainty. European markets face potential disruptions from Belgium’s strike, highlighting regional supply chain risks. Collectively, these events underscore a week of heightened market sensitivity, where investors must navigate fiscal policy shifts, monetary guidance, and macroeconomic indicators to reassess risk, positioning, and global capital flows.