The new Prime Minister of Japan pledged business-unfriendly policies with the Nikkei immediately replying.
The Nikkei, or Tokyo Stock Exchange, fell on Monday following the sweeping party election results last Friday which saw Shigeru Ishiba emerge victorious. Shigeru, who was elected leader of the Liberal Democratic Party, will replace Fumio Kishida as Japan’s Prime Minister this week.
Shigeru, a former Japanese defense minister, defeated his conservative rival Sanae Takaichi, considered by most experts the favorite winner. In a last-minute sweep, however, Shigeru Ishiba managed to rally the party behind his name, a “safer” and more moderate voice of Japanese politics.
“We must believe in the people, speak the truth with courage and sincerity, and work together to make Japan a safe and secure country where everyone can live with a smile once again,” Ishiba said after the vote.
However, markets consider Shigeru the less business-friendly choice. The new prime minister publicly pledged interest rate normalization to stabilize the yen’s declining value.
Interest rates in Japan have historically been close to 0 to encourage business investments. For several years, interest rates even fell into negative territory, a policy reversed only a few months ago.
However, keeping interest rates so low for so long depressed the yen’s value. This made Japanese exports cheaper, a blessing for Japan’s multinational companies that rely mostly on foreign purchases, but increased the price of imports.
Japanese consumers heavily rely on foreign imports as their home country can provide few natural resources. With the yen declining in value, prices for regular Japanese consumers skyrocketed.
Shigeru pledged to reverse this trend, protecting regular consumers while hurting Japanese companies’ exports. According to experts, he will likely continue the trend of his predecessor: an economic policy dubbed “new capitalism” focused on a more equal redistribution of wealth.
The yen immediately rose in value after the election, jumping 1.50% since Friday. In turn, the Nikkei shed 4.80% on Monday before closing almost 2000 points below.
“The Bank of Japan will continue to do its job, and, as a result, rates expectations will gradually rise”, said Shoki Omori, chief desk strategist at Mizuho Securities. The election outcome was “probably taken as a last-minute negative surprise for equities and yen carry-traders, but good for Japanese government bonds and market dynamics,” Omori said.
