(Bloomberg) -- The yen surged in a dramatic turnaround, Japanese bond futures dropped, and Nikkei 225 Stock Average futures retreated after Shigeru Ishiba clinched leadership of Japan’s ruling Liberal Democratic Party.
Markets had been pricing in a victory for Sanae Takaichi, whose comments earlier in the week in favor of the Bank of Japan keeping easy monetary policy helped drive the yen lower and underpinned a recovery in the Nikkei 225.
Here’s what analysts and strategists had to say:
Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo:
Many yen short sellers, particularly speculators and fast money funds, got burnt. All the expectations for risk-on, reflationary policy have faded as Ishiba became the next Prime Minister. Obviously many investors were expecting longer easy policy and thus got back on possible carry trades or shorted yen, but all the shorts are being unwound. The BOJ will do their own business going ahead, looking at data.
Alex Loo, a macro strategist at TD Securities:
Yen bulls are invigorated as Ishiba is known to be a monetary hawk based on his past remarks. Today’s outcome strengthens our conviction that the BOJ will hike again in December this year and US-Japan rates differential compression can drive USD/JPY back towards the 140 level. The risk to our view is that Ishiba suddenly calls a snap general election to secure his mandate from voters which will push the BOJ to the sidelines for this year.
Eugenia Victorino, head of Asia strategy at SEB.
Taking out the the uncertainty regarding government resistance to BOJ policy normalization allows JPY to strengthen again. Overall, BOJ policy is now dominating the narrative again. The political uncertainty today was unlikely to have a market impact beyond the next 24 hours.
Valentin Marinov, a strategist at Credit Agricole CIB in London:
“The surprise victory by the neoliberal Ishiba at the LDP presidential elections could embolden the yen bulls given that it could fuel expectations of further policy normalization by the BOJ, potentially as soon as October.
Moreover, any potential departure from the fiscal activism of Abenomics that has defined the last decade of Japan’s economic history could have some important implications for the yen carry trade. In particular, any debt attempt for debt reduction and/or waves of corporate restructurings could fuel repatriation flows into the currency in the long-run in a blow to the yen-funded carry trade.
Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd.
Ishiba’s victory should be a modest surprise to the markets because the momentum for Takaichi seemed rather strong before the run-off. This might reflect the calculation by many in the ruling party that staking the party’s future too aggressively on the continuation of Abenomics could backfire in the upcoming lower house election given the widespread discomfort with the yen’s weakness in past few years.
We think the new cabinet under Ishiba will be broadly supportive of the BOJ’s current gradual policy normalization plans, and this should push the yen higher in the coming months. Our base case remains another 25 basis point hike by the BOJ in December and further decline in USD/JPY to 135 in 12 months.
Hiroshi Watanabe, a senior economist at Sony Financial Group
Markets had briefly priced in Sanaenomics, but in the end the dollar dropped more than three yen and Japanese stock prices look set to lose all of their gains made today. There will be no big change in Japan’s economic policy. There won’t be excessive interference from the government on the BOJ.
The central bank will look to normalize its policy while looking at data, so that will be a little bit negative on stocks. We think the dollar will fall to around 139 yen by the end of year.
Charu Chanana, global markets strategist at Saxo Markets.
This leaves the yen back to being a yield-differential play, while defense stocks in Japan could be a big focus as Ishiba calls for an ‘Asian Nato’.
Hidetoshi Ohashi, chief credit strategist at Mizuho Securities
Markets will likely be volatile in the short term. After the unwinding is over and things return to normal, markets will calm down.
Ishiba’s policy is not that different from Kishida. If he emphasizes restoring fiscal discipline, the strong yen will have a negative impact on the yen-denominated profits of Japanese companies this year if the dollar falls below 140 yen. This could lead to a fall in stock prices, a drop in sentiment, and the BOJ may find it difficult to raise interest rates. If stocks fall and sentiment becomes negative, credit spreads may widen too.
Andrew Jackson, strategist at Ortus Advisors Pte.
The markets are reacting drastically to the news that Ishiba has won the run off, as seen by the surging yen. The market definitely seemed to be positioning for a Takaichi win coming into the close, so now it looks like banks will be back in favor, while exporters get sold.
Ishiba leans heavily to the right and is known to be a military buff, so expect the heavies to keep running, although he seems to be less of a China-hawk than Takaichi so there may be more to run for the Japan-China names yet.
Chisa Kobayashi, Japan equity strategist at UBS SuMi TRUST Wealth Management
Ahead of the results, the consensus in the market was that Takaichi would be the most positive. So stock prices will roll back the gains they made this afternoon but the impact is unlikely to go beyond that.
Nana Otsuki, a senior fellow at Pictet Asset Management Japan Ltd.
If the government were to spend generously, the yen would weaken in the long term. Even if the government’s monetary policy was neutral, if it expands its budget for local development and other projects, as well as for defense, this would cause long-term concerns about the government’s finances, and the yen would weaken.
--With assistance from Ayai Tomisawa, Momoka Yokoyama, Hideyuki Sano and Masaki Kondo.
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