Shigeru Ishiba's surprise election as the leader of Japan's ruling Liberal Democratic Party has raised expectations of a rate hike, causing a significant drop in Japan's stock market. As markets opened on Monday, the Nikkei 225 Index fell sharply, dipping below 39,000 points and expanding its losses to 4%.
Ishiba was elected after the Tokyo trading day closed last Friday. Before the final results were announced, the Nikkei 225 Index had risen by 2.3% as traders bet on the anti-rate hike candidate Sanae Takaichi winning. According to NHK, Ishiba plans to hold general elections on October 27. Reports suggest that Katsunobu Kato will become the next Finance Minister, succeeding Shunichi Suzuki.
Analysts predict significant market volatility in the short term until Ishiba's policies become clearer. The yen may strengthen, harming exporters, while banks could benefit from increased interest rates. Some analysts also point out that Ishiba’s plans to boost Japan's military strength could benefit the defense sector.
Rina Oshimo, a strategist at Okasan Securities Co., noted that market volatility could continue early this week. Ishiba's advocacy for fiscal consolidation might lead to yen appreciation, posing a challenge for the Japanese stock market.
Ishiba supports the independence and normalization pathway of the Bank of Japan, emphasizing the need to overcome deflation. In an interview last Sunday, Ishiba urged the Bank of Japan to maintain its monetary easing policies. Although the central bank operates independently, it often faces political pressure.
The soon-to-be Prime Minister and former Defense Minister stated his support for a new tax-free plan similar to individual savings accounts in Japan. He also intends to dissolve Japan’s House of Representatives early in his term. Ishiba has previously expressed a desire to raise capital gains tax on investment income.
When Fumio Kishida became Prime Minister in 2021, his proposal to increase capital gains tax led to a drop in the Nikkei 225 Index, known as the “Kishida Shock.” He quickly abandoned this plan, relieving the market. Earlier this year, factors such as a weak yen, optimism about corporate governance reforms, and Warren Buffett (Trades, Portfolio)'s support pushed the blue-chip index to record levels.
However, Japan's stock market became the epicenter of global sell-offs in August after a Bank of Japan rate hike led to yen appreciation. Although some losses have been recovered since then, the market remains vulnerable to yen fluctuations. Ishiba also advocates supporting Japan's rural economy.
Hirofumi Kasai, a senior strategist at Tokio Marine Asset Management Co., suggested that domestic-focused Japanese stocks, particularly those benefiting from regional rejuvenation measures, will be favored. The overall direction out of the deflation period will not change.
Morgan Stanley MUFG Securities Co. advises investors to focus on domestic demand-driven stocks until concerns about increasing corporate tax burdens are alleviated.
Goldman Sachs warned that market volatility might persist in the short term until Ishiba clarifies his stance on key investor concerns such as corporate governance reforms and financial asset income tax rates.
The Japanese parliament is expected to confirm 67-year-old Ishiba as Prime Minister in a vote on October 1. At that time, investors will likely shift their focus to election timelines, economic data, and the U.S. elections.
