Japanese stocks are sinking after the ruling party elected Shigeru Ishiba as prime minister

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Japanese shares fell sharply on Monday as traders in Tokyo reacted to the unexpected emergence of Shigeru Ishiba as the country’s next prime minister and the possibility that he could hold a general election within four weeks.

The closely watched Nikkei 225 fell more than 4.2 percent in the first hour of trading, led lower by housing and export shares as the market assessed the impact of a new leader who spent little of his long political career focused on the economy, but seems eager to raise corporate taxes.

Officials close to Ishiba were quoted in Japanese media as saying the incoming prime minister could call a general election on Oct. 27, adding to the uncertainty hanging over the Tokyo market. A ruling party official confirmed to the Financial Times that a snap election in October was “among a number of possibilities under discussion”.

Ishiba will be sworn in as prime minister on Tuesday after unexpectedly winning internal elections to lead the ruling Liberal Democratic Party last week. Of the nine candidates running, Ishiba, 67, was seen by political analysts as the third most likely to win.

Monday’s selloff, which sent the Topix down 3.3 percent, was a reversal from the previous week’s rally and was consistent with analysts’ warnings that the immediate market fallout from Ishiba’s victory was likely volatile.

Traders said the disappointing economic numbers added to the selling pressure. Japan’s August industrial production figures released on Monday showed seasonally adjusted output fell by more than 3 percent, a much sharper drop than the 0.5 percent drop expected.

Japan’s industrial output is still lower than it was in 2023 and more than 10 percent lower than it was before the pandemic, noted Stefan Angrick, senior economist at Moody’s Analytics.

“Business forecasts do not give much cause for optimism. Projections point to weak output in September and a modest rebound in October that will barely make up for losses this month. Japanese manufacturers are in bad shape,” said Angrick, who noted that this and a string of weak recent data would now make life difficult for the Bank of Japan and Ishiba.

The stock rose nearly 5 percent last week ahead of Friday’s LDP leadership election. The market expected the winner to be Sanae Takaichi, who strongly advocated for the BoJ to maintain ultra-loose monetary policy and intended to follow the market-friendly “Abenomics” playbook.

Much of Monday’s selling focused on manufacturing companies or tourism-oriented retailers, which are likely to be hurt by a stronger yen.

Ishiba’s comments during the campaign suggest to traders that he is broadly supportive of the BoJ’s current policy normalization and interest rate hikes, which have propelled the yen 12 percent higher against the dollar since July.

Shares of department store Isetan Mitsukoshi, a benchmark for luxury spending by foreign visitors, fell 11 percent, while its closest rival J. Front Retailing fell 8 percent.