Shigeru Ishiba, the newly elected leader of Japan’s ruling party, has been a proponent of raising interest rates to help curb inflation.
Credit...Pool photo by Kim Kyung-Hoon

Stocks in Japan Tumble After Party’s Election of New Prime Minister

Stocks dropped after Japan’s governing party chose Shigeru Ishiba, a critic of the country’s longstanding ultralow interest rates, as its leader.

by · NY Times

Stocks in Japan fell sharply after the country’s governing party chose a leader some view as hawkish on interest rates, underlining how central bank decisions continue to set the course of the world’s fourth-largest economy after decades of easy money policy.

On Friday, Japan’s Liberal Democratic Party elected Shigeru Ishiba, a proponent of raising interest rates to help curb inflation, as Japan’s next prime minister.

Mr. Ishiba narrowly defeated Sanae Takaichi, a disciple of Shinzo Abe, who remains committed to the former prime minister’s longstanding policies aimed at strengthening Japan’s economy by maintaining ultralow interest rates.

Japan’s benchmark Nikkei 225 index was down about 4.5 percent on Monday afternoon.

Some economists said the decline, which they described as the “Ishiba Shock,” was caused by the unwinding of stock trading that reflected expectations that Ms. Takaichi would be elected.

The market jitters show how the recent L.D.P. election came at a pivotal moment for the Japanese economy.

Following a recent surge of inflation, the Bank of Japan has raised interest rates twice this year. The bank’s governor, Kazuo Ueda, has indicated he plans to continue increasing rates, though it is unclear how quickly that might happen.

This month, the Bank of Japan held rates steady, with some suggesting it was waiting for political dynamics related to the L.D.P. election and other factors to stabilize.

In recent years, the significant gap between Japan’s rock-bottom interest rates and higher rates in the United States has led investors to seek higher returns outside Japan.

This has weakened the yen, which in turn lifted the share prices of major Japanese companies that benefited from the bump up in their profits overseas.

Some economists and analysts have questioned whether the rise in Japanese stocks over the past two years was a bubble driven by the weak yen.

Given Ms. Takaichi’s criticism of the Bank of Japan’s rate increases, the stock market rally seemed poised to continue. On Friday, after Ms. Takaichi took the lead in the first round of voting, the yen quickly weakened and Japan’s benchmark stock index rose.

The movements in the yen began to reverse when Mr. Ishiba was elected after Tokyo markets closed for the day. The yen was trading at around 142 to the dollar on Monday, compared to more than 146 on Friday.

In comments on Friday evening, Mr. Ishiba reiterated his belief that to bolster Japan’s economy, interest rate increases, rather than cuts, would be necessary to help bring down inflation and stimulate sluggish consumer spending.

Mr. Ishiba, who is set to take office on Tuesday, also addressed other major focuses, including supporting Japan’s regional economies and encouraging the relocation of production bases back to Japan.

Major banks believe that Monday’s market movements may represent the extent of big reactions to the L.D.P. election. Mr. Ishiba appeared to attempt to calm investors over the weekend by saying that borrowing in Japan should remain relatively low-cost.

Barclays researchers wrote in a note that Mr. Ishiba is likely to respect the independence of the Bank of Japan’s interest rate decisions. They maintained their forecast for a bump up in interest rates in January.

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