Japan is set to have a new Prime Minister, Shigeru Ishiba, but the stock market seems less than thrilled. On Monday, the Nikkei 225 index opened with a drop of over 4%, while the Topix index declined by 1.6%. As of now, the Nikkei 225 has fallen by 4.18% and the Topix by 3.61%.
The sharp decline is largely due to investor concerns that former Defense Minister Shigeru Ishiba's tenure might lead to an increase in Japanese interest rates. Following the news on Friday of Ishiba winning the Liberal Democratic Party leadership, the Nikkei 225 futures plummeted 6%. Prior to the announcement, the Nikkei was up by 2.3% as the market had bet on Sanae Takaichi, who opposed interest rate hikes, to win and become Japan's first female prime minister.
Analysts had warned that Japanese stocks might experience significant short-term volatility until Ishiba's policies become clearer. His stance is seen as favorable to the yen, which could headwind exporters but be beneficial for banks due to rising interest rates. Additionally, Ishiba's plan to increase military spending could benefit defense stocks.
In recent remarks, Ishiba expressed his support for the independence and normalization path of the Bank of Japan. However, given that the BOJ typically faces heavy government pressure, the market is highly attentive to the Japanese government's monetary perspective.
In a Sunday interview, Ishiba emphasized that the BOJ should continue its monetary easing policies. However, Monday's stock movements indicate ongoing market doubts regarding Ishiba's statements.
Rina Oshimo, a strategist at Okasan Securities in Tokyo, pointed out that Ishiba’s advocacy for fiscal consolidation and other measures could strengthen the yen and pressure Japanese stocks, leading to inevitable market fluctuations early in the week.
Hirofumi Kasai, a senior strategist at Tokio Marine Asset Management, suggested focusing on domestically oriented companies. Given Ishiba's intention to support the rural economy, stocks benefiting from regional revitalization measures may be favored. Additionally, Japan's overall direction out of deflation is not expected to change.
Morgan Stanley MUFG Securities is also focusing on domestic demand-driven stocks. Meanwhile, Goldman Sachs advised investors to brace for short-term volatility until Ishiba's positions become clear.
