Japanese stocks sink after ruling party chooses Shigeru Ishiba as PM

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Japanese stocks fell heavily on Monday as traders in Tokyo reacted to the unexpected emergence of Shigeru Ishiba as the country’s next prime minister and the possibility that he might hold a general election within four weeks.

The closely watched Nikkei 225 index fell more than 4.2 per cent in the first hour of trading, led lower by property and exporter stocks as the market assessed the impact of a new leader who has spent little of his long political career focused on economics but appears keen to raise corporate taxes.

Officials close to Ishiba were cited in Japanese media as saying that the incoming prime minister might call for a general election on October 27, adding to the uncertainty hanging over the Tokyo market. One ruling party official confirmed to the Financial Times that an October snap election was “among a range of possibilities under discussion”.

Ishiba will be sworn in as prime minister on Tuesday after unexpectedly winning an internal leadership election of the ruling Liberal Democratic party last week. Among the nine candidates who stood, 67-year-old Ishiba had been deemed by political analysts as the third most likely to win.

The Monday sell-off, which sent the Topix down 3.3 per cent, represented a reversal of the previous week’s rally and was in line with warnings by analysts that the immediate market aftermath of Ishiba’s victory was likely to be volatile.

Traders said disappointing economic figures added to the selling pressure. Japan’s August industrial production numbers released on Monday showed seasonally adjusted output fell more than 3 per cent, a far sharper drop than the expected 0.5 per cent decline.

Japan’s industrial output is still lower than in 2023 and more than 10 per cent below where it was before the pandemic, noted Stefan Angrick, senior economist at Moody’s Analytics.

“Business forecasts don’t offer much reason for optimism. Projections point to lacklustre production in September and a modest rebound in October that will barely make back the losses incurred this month. Japan’s manufacturers are in bad shape,” said Angrick, who noted that this and a poor run of recent data would now make life very difficult for the Bank of Japan and Ishiba.

Shares had risen by almost 5 per cent last week ahead of Friday’s LDP leadership election. The market had expected the winner to be Sanae Takaichi, who has advocated strongly for the BoJ to maintain its ultra-loose monetary policy and had intended to follow the market-friendly “Abenomics” playbook.

Much of Monday’s selling was focused on manufacturing companies or tourist-oriented retailers that were likely to be hit by a stronger yen.

Ishiba’s comments during campaigning suggest to traders that he is broadly supportive of the BoJ’s current trend of policy normalisation and interest rate rises, which have propelled the yen 12 per cent higher against the dollar since July.

Shares in the department store Isetan Mitsukoshi, a bellwether for luxury spending by foreign visitors, fell 11 per cent while its nearest rival, J. Front Retailing, fell 8 per cent.