On September 27, the Nikkei 225 futures market experienced a dramatic drop, falling over 2000 points and triggering a circuit breaker. By approximately 7 PM EST, the index was down more than 4%. Concurrently, the Japanese yen showed significant volatility, with the USD/JPY exchange rate initially dropping by over 1%, then sharply reversing to gain over 1%, marking a swing of more than 2.5%.
Earlier that day, Shigeru Ishiba was elected the 28th president of Japan's Liberal Democratic Party (LDP). He is set to replace Fumio Kishida as Japan's new Prime Minister on October 1.
Following Ishiba's election, the Nikkei 225 futures initially plunged 2220 points, triggering a circuit breaker with a maximum drop of 5.6%. The currency market also reacted strongly; the yen surged 370 basis points from a loss of over 1% to a gain of over 1%, peaking at 142.78 USD/JPY and closing at a 1% gain, trading at 143 yen per dollar by approximately 7 PM EST.
Shigeru Ishiba supports the Bank of Japan's (BOJ) gradual interest rate hikes and has expressed concerns over the yen's depreciation. His election has heightened market expectations of tighter monetary policy, which saw the yen's value spike.
Shigeru Ishiba, aged 67, has a political career spanning 38 years, previously holding roles such as Secretary General of the LDP and Chairman of the Policy Research Council. His background includes experience in agriculture, security, and regional revitalization.
Political analysts suggest that Ishiba's leadership will likely promote a balanced budget and support for BOJ's normalization of interest rates. The BOJ, after extensive monetary stimulus, initiated its first rate hike in 17 years this March. Market experts do not foresee major shifts in Japan's economic policies under Ishiba’s leadership.
Ishiba's stance aligns with continued monetary policy tightening efforts by the BOJ, aimed at boosting the yen while addressing regional economic disparities, particularly in depopulated rural areas.
Economist Alvin Liew from UOB noted that Ishiba's win signifies backing for BOJ Governor Kazuo Ueda's policy normalization efforts. UOB predicts a 25 basis point rate hike by the BOJ in Q4, setting the terminal rate at 0.5%.
The broader market outlook remains cautious, as traders are wary of potential impacts on the stock market from increased tightening, even though Goldman Sachs still forecasts strong corporate earnings and a positive performance for the Japanese stock market by year-end. Key strategist Kazunori Tatebe emphasized that the U.S. economy will be a critical factor influencing Japan's stock market in the coming months.
Analysts also indicated that the banking sector may benefit from further BOJ rate hikes, as evidenced by the Tokyo Stock Exchange bank index outperforming the broader market amid tightening expectations.
