Yen rallies as Ishiba wins LDP leadership Nikkei Futures Fall

(Bloomberg) — The yen reversed losses and rose against the dollar as futures fell after Shigeru Ishiba was voted leader of Japan’s ruling party, defeating a rival who opposed a rate hike interest.

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The currency strengthened as much as 1.3 percent to 142.96 on the announcement, after weakening as much as 1.2 percent earlier on Friday. Although the Bank of Japan is independent from the government, speculation about political pressure on monetary policy has currency traders betting on the outcome of the election.

Futures for Japan’s benchmark 10-year government bond fell, pointing to the prospect of higher yields. Contracts for the Nikkei 225 gauge fell to 38,570.00 as of 4:13 p.m. in Tokyo on the Chicago Mercantile Exchange. The Nikkei had previously closed at 39,829.56.

Ishiba, a 67-year-old party veteran who has held several top posts including defense minister, is seen as backing the BOJ’s plan to gradually raise rates. He won against opponent Sanae Takaichi in the runoff. She had recently said it was “foolish to raise rates now”. Speculation ahead of the results that Takaichi would win sent the yen lower.

“Certainly, the market seemed to be positioning itself for a Takaichi win,” said Andrew Jackson, strategist at Ortus Advisors. “Markets are reacting sharply to the news that Ishiba won the round, as seen by the yen’s rise.”

With the PDL election off, the market is now shifting its focus to narrowing the interest rate gap between the US and Japan. Although Ishiba is more supportive of the BOJ’s policy adjustments, Governor Kazuo Ueda stressed that the central bank is in no rush to raise rates. Traders also remain uncertain about the speed and size of the Federal Reserve’s next moves.

“This leaves the yen as a yield differential play,” said Charu Chanana, global markets strategist at Saxo Markets. “There is room for strength, but the pace will depend on the Fed rate cut cycle.”

–With assistance from Yasutaka Tamura and Kana Nishizawa.

(Updates with more details and new prices)

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