After Shigeru Ishiba unexpectedly won the ruling party's presidential election, the Tokyo stock market experienced a sharp decline, with the Nikkei 225 index falling below 39,000 points. The intraday decline reached 3.28%, further expanding to 4.3%.

This decline reflects investors' uncertainty about Shigeru Ishiba's policy direction. They have begun to reduce positions established based on speculations that Takaichi will become the new Prime Minister of Japan and encourage the Bank of Japan to maintain low interest rates. The yen fell 0.3% against the US dollar to 142.68, having risen about 1.8% last Friday, while the December-delivery Japanese 10-year government bond futures fell by 0.60 to 144.62.

Market analysts expect that market volatility may intensify in the short term until Shigeru Ishiba's policy position becomes clearer. It has been reported that Ishiba may hold a general election on October 27, and according to Kyodo News, Katsunobu Kato will become the next Finance Minister.

Rina Oshimo, a strategist at Tokyo Okazan Securities, said, "There may be fluctuations at the beginning of this week. Due to Ishiba's continuous advocacy of fiscal consolidation and other measures, the appreciation of the yen may become a resistance for the Japanese stock market."

Exporters like Keyence Corp. and Fujitsu Limited have been the biggest drag on the Toueiri index, as the stronger yen dims profit prospects. Bank stocks fell last week on speculation about Takaichi's victory but rose on Monday.

Ishiba called for the Bank of Japan to clarify its policy normalization plan and emphasized further regional economic development with government spending to address the issue of declining population in rural areas. However, overall, he still supports the Bank of Japan to stay away from ultra-low interest rates, while Takaichi believes further rate hikes at this point are "foolish".

He also mentioned that he would support a new tax-free plan similar to individual savings accounts in Japan and intends to dissolve the Japanese House of Representatives early in his term. There were previous reports that Ishiba hopes to increase the capital gains tax on investment returns.

Analysts said that after Shigeru Ishiba's victory, expectations of a rate hike by the Bank of Japan have heated up again. In 2021, when Japanese Prime Minister Fumio Kishida took office, his proposal to increase the capital gains tax led to a decline in the Nikkei 225 index, known as the "Kishida shock". He quickly withdrew the plan, bringing relief to the market. With the help of a depreciating yen, optimism about corporate governance reforms, and Warren Buffett's support, the index reached a historical high earlier this year.

But the interest rate hike by the Bank of Japan led to the appreciation of the yen, making the Japanese stock market the epicenter of the global stock market crash in August. Although stock prices have recovered some lost ground since then, the market is still vulnerable to fluctuations in the yen. Shigeru Shigeto also advocates supporting the rural economy in Japan.

Hirofumi Kasai, senior strategist at Tokyo Marine Asset Management, said: "Domestic stocks, especially those benefiting from regional revitalization measures, will be favored. The overall direction out of deflation will not change."

Morgan Stanley Mitsubishi UFJ Securities Co. advises investors to focus on domestically oriented stocks until concerns about increasing corporate tax burdens are alleviated. Goldman Sachs Group warns that short-term volatility may persist until Shigeru Shigeto clarifies his position on "investor concerns in areas such as corporate governance reform and financial asset income tax rates."

The Japanese parliament is expected to vote on October 1 to confirm 67-year-old Shigeru Shigeto as Prime Minister. At that time, investors' attention may shift to election timing, economic data, and the US election.

Editor/Lambor