Japanese stocks took a steep dive on Monday as unexpected political developments sent shockwaves through the market. The Nikkei 225 index fell by as much as 4.7% after Shigeru Ishiba unexpectedly won the Liberal Democratic Party presidential election last Friday, catching investors off guard who had bet on Sanae Takaichi's victory and her promise of more monetary stimulus.
The Nikkei 225's performance lagged behind the Topix index by over one percentage point, driven primarily by short-term speculative traders who prefer the high liquidity and volatility of the Nikkei. The Japanese yen weakened by 0.3% against the U.S. dollar to 142.68 after a substantial rise of about 1.8% last Friday, and Japan's 10-year government bond futures fell.
Strategists believe this decline is a temporary setback given recent market gains fueled by Takaichi's anticipated win. Investors were more focused on inflation, wage growth, and market reforms rather than the Bank of Japan's loose monetary policy. The market is expected to refocus on these fundamental aspects.
Shigeru Ishiba generally supports the Bank of Japan's continued exit from ultra-low interest rate policies, a sharp contrast to Takaichi who considered further rate hikes "foolish." Reports suggest that Katsuya Okada is likely to be appointed as the Finance Minister, which could alleviate concerns over a drastic departure from former Prime Minister Shinzo Abe’s reflationary policies, given Okada's support for "Abenomics."
Ishiba has called for clearer guidance on the normalization of monetary policy from the Bank of Japan and emphasized the importance of government spending to boost local economies and address rural population decline.
Yugo Tsuboi, chief strategist at Daiwa Securities, noted that Ishiba avoided discussing monetary policy and tax issues in recent television appearances, likely to prevent market tensions ahead of the upcoming general election.
Reports indicate that Ishiba may announce an early election date on October 27.
