On September 27, Mr. Ishiba won the Liberal Democratic Party (LDP) leadership election. The stock market, which had closed 903 yen higher the previous day due to the "Takaichi Rally," reversed after Ishiba's victory. Nikkei stock futures fell more than 2,000 during U.S. trading hours. Among the nine candidates who ran in the leadership race, Ishiba and Takaichi had opposite views on economic policy. Ishiba emphasized "fiscal discipline and moderate monetary easing," while Takaichi advocated for "Stimulative fiscal policies and aggressive monetary easing."

However, Ishiba emphasized in several TV programs (TV Tokyo, Fuji TV, NHK) over the weekend that he would basically continue the economic policies of the Kishida, which has been successful in raising wages. Regarding financial income taxation, he stated, "The trend from savings to investment must never be stopped." He also repeatedly said regarding monetary policy, "The direction of easing must be maintained" and "Monetary policy should be left to the Bank of Japan." Although some foreign investors briefly speculated about a possible rate hike at the October meeting following Ishiba's victory, general view among the market participants is that Ishiba does not have a strong commitment to monetary policy.

The yen strengthened following Ishiba's victory. This seems to have been driven by a combination of foreign investors selling Japanese stocks and unwinding their currency hedges (buying yen), along with speculation that the Bank of Japan might raise rates under the Ishiba administration. In this regard, I believe that a government less aggressive on easing would result in more gradual rate hikes. As seen from last Friday's market movements, the yen's depreciation is likely to be curbed, which would put downward pressure on import prices and give the Bank of Japan more "time to assess the underlying inflation." In particular, since the Bank of Japan has been increasingly dependent on currency movements in recent days, a stronger yen would give the BOJ more time to wait for a rate hike. Had Takaichi been elected leader, it was almost certain that she would have pressured the Bank of Japan to continue easing. In that case, the yen could have rapidly depreciated, raising the risk of higher import prices and potentially forcing the Bank of Japan to hike rates sooner. If the USD/JPY were to rise above 160 yen again, the BOJ would have decided to raise interest rate additionally, even under pressure from the government. I believe this leadership election has resulted in prolonged low-interest policies by curbing excessive yen depreciation.

Original in Japanese:
https://www.dlri.co.jp/report/macro/378063.html