The Nikkei 225 in Japan experienced a significant drop of over 4% on Monday following the election of incoming Prime Minister Shigeru Ishiba. Despite August retail sales exceeding estimates, Ishiba’s win over Sanae Takaichi in the Liberal Democratic Party election sent the yen into a volatile session. This victory implies that the Bank of Japan may not face political obstacles when considering raising interest rates, a move that would typically strengthen the yen and put pressure on Japanese stock markets, particularly those heavily weighted by exporters. The yen weakened against the dollar early on Friday when Takaichi won the first round of voting, but later strengthened when Ishiba emerged as the winner, surprising many market participants.
Although Takaichi is an advocate for lower rates, which could benefit exporters, Steven Glass of Pella Funds Management argues that due to inflation being primarily imported, raising rates may not make sense for the Bank of Japan. He believes Ishiba’s prime ministership will increase the likelihood that rates will remain stable. This sentiment is supported by August’s industrial production decline of 4.9% year on year, a sharper drop than expected, indicating economic challenges ahead. The contrast between Japan and China’s markets is also significant, as China’s recent surge has put pressure on Japan’s markets. With the CSI 300 in China recording its best week since 2008 and the Hang Seng index in Hong Kong experiencing its biggest weekly gain since 1998, the dynamics between the two markets have shifted.
The China market has traditionally been seen as the “anti-China trade,” meaning that Japan markets tend to do well when Chinese markets are not performing strongly. However, with the recent stimulus measures rolled out by China’s central bank, including lowering the reserve requirement ratio for banks and cutting short-term interest rates, the situation has changed. The PBOC has also announced a mortgage rate cut set to take effect at the end of October. These developments point to a potential shift in the relationship between the two markets, with a more synchronized impact on Japan’s economy as a result. The official purchasing managers’ index reading for September in China came in softer than expected, indicating a less severe contraction than economists had predicted.
Overall, Japan’s economic outlook depends on various factors, including political leadership under Ishiba, the potential for interest rate hikes, and the impact of China’s market performance. While some experts anticipate stability in interest rates under Ishiba, others argue that Japan’s reliance on imported inflation may necessitate caution in raising rates. The recent decline in industrial production and the pressure from China’s market rally further complicate the situation. As economic data continues to unfold, investors and analysts will closely monitor these trends to assess the implications for Japan’s economy and financial markets.
