Japanese stocks fall as Ishiba’s Win Wrongfoots eases bets

(Bloomberg) — Japanese stocks fell after Shigeru Ishiba’s surprise victory over Sanae Takaichi in the race to lead the ruling party misled investors who bet on a boost from more monetary stimulus from his rival.

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The Nikkei 225 average fell as much as 4.7 percent in early trading after Ishiba’s selection forced investors to trim positions that had been built on speculation Takaichi would become Japan’s new prime minister and encouraged the Bank of Japan to keep interest rates low. The yen fell 0.3 percent to 142.68 per dollar after rising about 1.8 percent on Friday, while 10-year futures for December delivery fell 0.70 to 144, 52.

The Nikkei underperformed the Topix by more than a percentage point, a sign that the selling was driven by short-term speculators who prefer to trade the Nikkei because of its high liquidity and volatility.

“There’s no surprise in today’s fall given how much the market has rallied over the past few sessions on the hope that Takaichi will win,” said Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “This will be a temporary move. . Investors bought Japanese stocks hoping for inflation, rising wages and market reforms, not for BOJ easing. The market will return to focus on fundamentals.”

Ishiba generally continued to argue that the central bank was continuing its path away from ultra-low rates, unlike Takaichi, who for the time being characterized further rate hikes as “foolishness”.

Kyodo News reported that Katsunobu Kato is set to become the next finance minister, a move seen as allaying concerns that Ishiba could radically scale back some of former Prime Minister Shinzo Abe’s reflationary policies. Kato was a supporter of Abenomics.

Ishiba called for more clarity on the BOJ’s plans to normalize policy and emphasized more development of regional economies to combat depopulation in rural areas, helped by government spending.

“He didn’t talk much about monetary policy or tax hikes when he appeared on some TV programs over the weekend,” said Yugo Tsuboi, chief strategist at Daiwa Securities. “He probably refrains from talking about policies that make markets jittery ahead of a possible election.”

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Ishiba could call a general election on October 27, public broadcaster NHK said.

Exporters were the hardest hit for the Topix as the yen’s strength dampened profit prospects. Banks, which sank last week on speculation that Takaichi would win, rallied.

Bets again on BOJ hike after Ishiba’s LDP win, analysts say

When Prime Minister Fumio Kishida took office in 2021, his proposals to raise taxes on capital gains led to a decline in the Nikkei 225 that was dubbed the “Kishida shock”. He quickly pulled back on the plan, providing relief to the market. Helped by a weaker yen, optimism about corporate governance reforms and the endorsement of Warren Buffett, the gauge rose to a record high earlier this year.

But Japanese stocks became the epicenter of a global crisis in August after the BOJ’s rate hike sparked a rally in the yen. While stocks have pared some of their losses since then, the market remains vulnerable to fluctuations in the yen’s movements. Ishiba also advocated supporting Japan’s rural economy.

“Inward-facing stocks will be preferred, especially those benefiting from regional revitalization measures,” said Hirofumi Kasai, senior strategist at Tokio Marine Asset Management Co. “The general direction outside the deflationary period will not change.”

Morgan Stanley MUFG Securities Co. advises investors to focus on domestic demand-oriented actions until concerns about rising corporate tax burdens are removed. Goldman Sachs Group Inc. warns that volatility is likely to persist in the short term until Ishiba clarifies his 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 Ishiba, 67, as prime minister in a vote scheduled for Oct. 1. Investors’ attention will likely turn to the timing of the general election, economic data and the US election.

–With assistance from Aya Wagatsuma and Winnie Hsu.

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