(Bloomberg) -- The yen reversed losses and surged against the dollar while Japanese stock futures fell after former defense minister Shigeru Ishiba won the leadership of the nation’s ruling party, beating a rival who opposed interest rate hikes.
The currency strengthened as much as 1.4% to 142.80 on the news, after weakening as much as 1.2% earlier on Friday. Although the Bank of Japan is independent from the government, speculation of political pressure on monetary policy had seen currency traders betting on the election result.
Futures for Japan’s benchmark 10-year government bonds slumped, pointing to the prospect of higher yields. December contracts for the blue-chip Nikkei 225 stock gauge slid 3.2% to 38,145.00 as of 5:20 p.m. in Tokyo on the Chicago Mercantile Exchange on the yen gains. Before that, the underlying Nikkei 225 closed 2.3% higher at 39,829.56, surpassing its level on July 31, the day the BOJ started a historic equity rout by raising rates.
“Japanese stock prices look set to lose all of their gains made today,” said Hiroshi Watanabe, a senior economist at Sony Financial Group. “The central bank will look to normalize its policy while looking at data, so that will be a little bit negative on stocks.”
Ishiba, a 67-year-old party veteran who has served in several senior roles, is seen as supportive of the BOJ’s plan to gradually hike rates. He won against opponent Sanae Takaichi in the run-off vote. She had said recently it was “stupid to raise rates now.” Speculation before the results that Takaichi would win had led a drop in the yen.
“The market definitely seemed to be positioning for a Takaichi win,” said Andrew Jackson, strategist at Ortus Advisors. “The markets are reacting drastically to the news that Ishiba has won the run off, as seen by the surging yen.”
With the LDP election out of the way, the market is now shifting its focus to the narrowing interest rate gap between the US and Japan. Although Ishiba is more supportive of BOJ policy adjustments, Governor Kazuo Ueda has emphasized that the central bank isn’t in a rush to hike rates. Traders also remain uncertain on the speed and size of the Federal Reserve’s next moves.
“This leaves the yen back to be a yield-differential play,” said Charu Chanana, global markets strategist at Saxo Markets. “There’s room for strength, but the pace will depend on the Fed’s rate cutting cycle.”
--With assistance from Kana Nishizawa and Hideyuki Sano.
(Updates prices and adds more detail on stock futures trading)
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