Stock market investors and currency traders cheered when Sanae Takaichi, a protege of former prime minister Shinzo Abe and proponent of his stock market-friendly Abenomics, rose in polls and won the ruling Liberal Democratic Party’s (LDP) first-round presidential election last Friday.
In that first round, Takaichi received 181 votes, followed by Shigeru Ishiba with 154, Shinjiro Koizumi (backed by ex-premier Yoshihide Suga) with 136 and six other candidates who lagged far behind. Financial professionals, who had ranked Takaichi as their top choice in an Asahi newspaper poll, celebrated in advance.
The Nikkei 225 rose 1,959.30 points, or 5.2%, in two days to peak at 39,829.56 on Friday afternoon after the first-round vote. But investor hopes were dashed when Ishiba won the run-off, 215 to 194, to become party leader and almost certainly Japan’s next prime minister.
The Nikkei 225 Futures index dropped almost 6% in the after-hours session on Friday. The Nikkei 225 itself lost 1,910.01 points, or 4.8%, on Monday (September 30), falling back to 37,919.55.
Takaichi had endeared herself to stock market investors by openly declaring her opposition to higher interest rates. Like her late mentor Abe, she favors monetary easing and stronger fiscal stimulus.
To people shocked by the price of tomatoes and almost everything else these days, she said, “Economic growth comes first and foremost.”
Ishiba, on the other hand, supports Bank of Japan Governor Kazuo Ueda’s policy of gradually raising rates to stabilize the yen, which had been dropping like a rock, and tame inflation.
Ishiba also said that he would consider raising corporate and financial income taxes, which would make Japan’s tax system more equitable and reduce its large government deficit.
Immediately after Ishiba’s victory was confirmed, the yen jumped from 146.2 to 143.3 to the dollar. It then continued to rise, reaching 141.65 on Monday.
The stock prices of Japanese exporters, on the other hand, were pounded. Toyota, which was up 2.0% on Friday, dropped 7.6% on Monday. Almost every sector was down, with the notable exception of banks, which should do well as interest rates rise.
The yield on 10-year Japanese government bonds rose 0.045ppts to 0.85%. The BOJ’s policy rate is 0.25%.
Financial market investors may be initially disappointed but Japanese business supports Ishiba. As reported by Nippon TV, the chairman of the Japan Chamber of Commerce and Industry called Ishiba “a knowledgeable policymaker who has addressed various challenges head-on.”
Like Ishiba, the Chamber of Commerce is dedicated to the support of small and medium-sized enterprises and the revitalization of local economies.
The chairman of Keidanren (Japan Business Federation), said that Ishiba is “the right leader to drive forward transformation” in the current challenging environment. Keidanren is generally regarded as the voice of Japan Inc.
Furthermore, an Asahi poll showed Ishiba to be the most popular candidate among the general public, supported by 26% of respondents compared with Takaichi’s 11%.
In the end, the LDP chose experience and pragmatism over a throwback to economic policies that were designed over a decade ago for a different economic era. The LDP’s choice will be put to the test at a general election, which Ishiba intends to call on October 27.
Takaichi was the favorite of stock market professionals who fooled themselves by buying the polls and the LDP election’s first-round results, failing crucially to consider where former prime minister Suga would direct Koizumi’s votes in the two-candidate run-off.
Looking for short-term gains, they fell for Takaichi’s go-for-growth rehash of Abenomics. But Japanese Inc favors Ishiba and so does the general public. This puts the opposition Constitutional Democratic Party in a difficult position as the LDP rebuilds its credibility with voters.
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