Shigeru Ishiba's 'surprise' victory broke market expectations, leading to a sharp decline in the Japanese stocks.

On Monday, September 30, due to Shigeru Ishiba's unexpected victory over Hiromi Kohno in the Liberal Democratic Party presidential election, investors were forced to cut positions based on the earlier expectation of Hiromi Kohno's victory. The market originally speculated that with Hiromi Kohno becoming the new Prime Minister, the Bank of Japan would be encouraged to maintain low interest rate policies and implement more monetary stimulus measures.

Shigeru Ishiba supports the Bank of Japan gradually moving away from ultra-low interest rate policies. After winning the leadership of the Liberal Democratic Party, the market has again bet on the possibility of the Bank of Japan raising interest rates.

Today, $Nikkei 225 Index (.NKY.US)$ On Monday, the market closed down 4.8% at 37,919.55 points, marking the largest single-day drop in the Japanese stock market since it entered a bear market on August 5. The TOPIX index fell by 3.5%.

Analysts Hideyuki Sano and Momoka Yokoyama stated that the decline in the Nikkei 225 index was 1.3% larger than the TOPIX index, indicating that the selling pressure on Japanese stocks was mainly driven by short-term speculators who prefer trading in the more liquid and volatile stocks of the Nikkei 225 index.

Today, the yen rose 0.2% against the dollar to 141.97; the 10-year bond futures for December delivery once fell 57 basis points to 144.65.

Due to the yen's strength, export companies are the biggest drag on the TSE index. Among 33 sectors, the banking sector is the only one that rose.

Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, said:

"The market's expectation of a Kishida victory has already been reflected in the three consecutive rises in the Japanese stock market before. Today's decline is not surprising, it's just a temporary adjustment. Investors buy Japanese stocks mainly because of expectations for inflation, wage increases, and market reforms, not based on the central bank's loose policy. The market will refocus on the fundamentals."

Mitsubishi UFJ Morgan Stanley advises investors to focus on domestically-oriented Japanese stocks until concerns about increased corporate tax burdens are alleviated. Goldman Sachs, on the other hand, warns that short-term volatility may persist until Fumio Kishida clarifies his position on corporate governance reform and financial asset income tax rates.

How will Japan's future monetary policy develop?

Shinzo Abe has spoken less about monetary and tax policies, and based on previous information, he calls for greater transparency in the Bank of Japan's policy normalization and emphasizes promoting local economic development through government spending to address the issue of declining rural populations. Yugo Tsuboi, Chief Strategist at Nomura Securities, said:

"Before the election, he did not discuss monetary or tax policies much on some television programs, possibly to avoid market tension and temporarily avoid discussing these policies."

However, what can be confirmed is that Shigetaka Shiba advocates normalizing interest rates and takes a positive stance on fiscal restructuring. Therefore, the market is concerned that after Shigetaka Shiba takes office, there may be a significant reduction in Abenomics.

However, according to Kyodo News, Katsunobu Kato is expected to become the next finance minister and has always been a supporter of "Abenomics." This partly alleviates market concerns.

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