(Bloomberg) — Japanese stocks tumbled after Shigeru Ishiba’s surprise victory over Sanae Takaichi in the ruling party’s leadership race, upsetting investors who had been betting on a boost from more monetary stimulus from his rival.
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The Nikkei 225 Stock Average fell as much as 4.7% in early trading after Ishiba’s selection forced investors to unwind positions built on speculation that Takaichi would become Japan’s new prime minister and encourage the Bank of Japan to raise interest rates to keep low. The yen settled 0.3% lower at 142.68 per dollar, after rising about 1.8% on Friday, while 10-year bond futures for December fell 0.70 to 144.52.
The Nikkei underperformed the Topix by more than one percentage point, a sign that the sell-off was driven by short-term speculators, who prefer to trade the Nikkei for its high liquidity and volatility.
“There is no surprise in the fall today given how much the market has rallied in the last few sessions on hopes that Takaichi would win,” said Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “This will be a temporary step. . Investors have been buying Japanese stocks on hopes of inflation, wage increases and market reforms – not because of the BOJ’s easing. The market will start to focus on the fundamentals again.”
Ishiba has generally remained in favor of the central bank continuing on its path of ultra-low interest rates, unlike Takaichi, who for now labeled further rate hikes as “stupid.”
Kyodo News reported that Katsunobu Kato is set to become the next finance minister, a move that would allay concerns that Ishiba would radically roll back some of former Prime Minister Shinzo Abe’s reflationary policies. Kato has been a supporter of Abenomics.
Ishiba has called for greater clarity on the BOJ’s plans to normalize policy, emphasizing greater development of regional economies to tackle depopulation in rural areas, aided by government spending.
“He didn’t talk much about monetary policy or tax hikes when he appeared on a number of TV programs this weekend,” said Yugo Tsuboi, chief strategist at Daiwa Securities. “He is likely to refrain from talking about policies that make markets nervous ahead of a likely election.”
Ishiba could call a general election on October 27, public broadcaster NHK said.
Exporters bore the brunt of the Topix as the yen’s strength dented the profit outlook. Banks, which fell last week on speculation that Takaichi would win, rose.
Betting for BOJ hikes is back in business after Ishiba’s LDP win, analysts say
When Prime Minister Fumio Kishida took office in 2021, his proposals to increase taxes on capital gains led to a drop in the Nikkei 225 that was dubbed the “Kishida shock.” He quickly backed away from the plan and provided relief to the market. Helped by a weaker yen, optimism about corporate governance reforms and support from Warren Buffett, the gauge rose to a record earlier this year.
But Japanese shares became the epicenter of a global rout in August after the BOJ rate hike triggered a rise in the yen. While stocks have since recovered some of their losses, the market remains vulnerable to swings in yen movements. Ishiba has also advocated supporting Japan’s rural economy.
“Domestic-oriented stocks, especially those benefiting from regional revitalization measures, will be favored,” said Hirofumi Kasai, senior strategist at Tokyo Marine Asset Management Co. “The overall direction after the deflation period will not change.”
Morgan Stanley MUFG Securities Co. recommends that investors focus on domestic demand-oriented stocks until concerns about rising corporate tax burdens are addressed. Goldman Sachs Group Inc. warns that short-term volatility is likely to persist until Ishiba clarifies its position “on areas of concern to investors, such as corporate governance reform and tax rates on income from financial assets.”
Japan’s parliament is expected to confirm 67-year-old Ishiba as prime minister in a vote scheduled for October 1. Investors’ attention will likely turn to the timing of general elections, economic data and the US election.
–With help from Aya Wagatsuma and Winnie Hsu.
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