Rate Hike Fears Loom Over Market

Japanese stocks face a turbulent week after Shigeru Ishiba’s surprising win in the ruling party’s leadership race, raising fears of interest rate hikes. Futures for the Nikkei 225 plummeted 6% in Osaka.

Before Ishiba’s selection, traders were backing Sanae Takaichi, who opposed rate increases. The Nikkei had risen 2.3% prior to the announcement, reflecting a swift shift in market sentiment as investors reconsider the impact of Ishiba’s leadership.

Currency Effects and Sector Responses

Following Ishiba’s election, the yen has strengthened, impacting sectors variably. While exporters may struggle, banks could benefit from higher interest rates. Analysts believe Ishiba’s military expansion plans might also boost the defense sector.

Rina Oshimo, a strategist at Okasan Securities, predicts a volatile start to the week, noting that Ishiba’s emphasis on fiscal consolidation could pose challenges for Japanese equities amid the yen’s rise.

What’s Next for Ishiba’s Policies?

Ishiba, a former defense minister, supports the Bank of Japan’s independence while advocating for ongoing monetary easing to combat deflation, despite potential political pressures.

His leadership may also spark tax policy debates. While he backs new tax exemption programs, he has suggested increasing capital gains taxes on investment income. This approach mirrors past proposals that caused market declines, reminiscent of the “Kishida shock” after Prime Minister Kishida’s initial tax hike discussions.

Investors on Edge

As Ishiba prepares for his prime ministerial confirmation on October 1, investors are eager for clarity on his economic agenda. Concerns over potential tax hikes and corporate governance reforms persist, with analysts from Goldman Sachs cautioning that market volatility may continue until these issues are clarified.

Morgan Stanley MUFG Securities recommends focusing on domestically oriented stocks, particularly those poised to benefit from regional revitalization efforts, until there is more certainty regarding corporate tax impacts. Senior strategist Hirofumi Kasai from Tokio Marine Asset Management notes that the trend away from deflation remains stable.

The market will likely respond not just to Ishiba’s policy announcements but also to forthcoming economic data and the U.S. election, adding complexity to Japan’s investment landscape.