(Bloomberg) — The yen pared losses and rose against the dollar, while stock futures fell after Shigeru Ishiba was elected leader of Japan’s ruling party, beating a rival opposed to interest rate hikes.
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The currency strengthened as much as 1.3% to 142.96 on the announcement, after weakening as much as 1.2% earlier on Friday. Although the Bank of Japan is independent of the government, speculation about political pressure on monetary policy has currency traders betting on the election outcome.
Japanese 10-year government bond futures fell, pointing to the prospect of higher yields. Contracts for the Nikkei 225 stock gauge fell to 38,570.00 as of 4:13 p.m. in Tokyo on the Chicago Mercantile Exchange. The Nikkei previously closed at 39,829.56.
Ishiba, a 67-year-old party veteran who has held several senior positions including defense minister, is seen as a supporter of the BOJ’s plan to gradually raise interest rates. He won against opponent Sanae Takaichi in the second vote. She had recently said it was “stupid to raise rates now.” Speculation before the results that Takaichi would win had led to a fall in the yen.
“The market certainly seemed to be positioning itself for a Takaichi win,” said Andrew Jackson, strategist at Ortus Advisors. “Markets are reacting dramatically to the news that Ishiba has won the run-off, as evidenced by the rising yen.”
With the LDP elections behind us, the market is now shifting its focus to the narrowing interest rate gap between the US and Japan. While Ishiba is more in favor of policy adjustments by the BOJ, Governor Kazuo Ueda has emphasized that the central bank is in no rush to raise rates. Traders also remain uncertain about the speed and scale of the Federal Reserve’s next steps.
“This leaves the yen as a game of yield differentials,” said Charu Chanana, global market strategist at Saxo Markets. “There is room for strength, but the pace will depend on the Fed’s rate-cutting cycle.”
–With help from Yasutaka Tamura and Kana Nishizawa.
(Updates with more details and new prices)
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