Stocks fell sharply in Japan as the country’s ruling party hinted at a leader on interest rates, underscoring how the central bank’s decisions set the course for the world’s fourth-largest economy after decades of easy monetary policy.
On Friday, Japan’s Liberal Democratic Party endorsed Shigeru Ishiba as Japan’s next prime minister to raise interest rates to help control inflation.
Mr. Sane Tagaichi, a disciple of Shinzo Abe. Narrowly defeated by Ishiba, he remains committed to the former prime minister’s long-standing policies of strengthening Japan’s economy by maintaining ultra-low interest rates.
Japan’s benchmark Nikkei 225 index was down about 4.5 percent on Monday afternoon.
Some economists attributed the decline, which they described as an “Ishiba shock,” to a pullback in stock trading that reflected expectations that Ms. Takaichi would be elected.
Market jitters show how the recent LDP election came at a pivotal moment for the Japanese economy.
Following recent inflation, the Bank of Japan has raised interest rates twice this year. The bank’s governor, Kazuo Ueda, has indicated that he plans to continue raising rates, although it’s unclear how quickly that will happen.
This month, the Bank of Japan kept rates steady, with some saying it was waiting for political dynamics related to the LDP election and other factors to stabilize.
In recent years, the significant gap between Japan’s rock-bottom interest rates and higher rates in the United States has led investors to seek higher returns outside Japan.
This weakened the yen, which in turn boosted the share prices of large Japanese companies that benefited from rising profits overseas.
Some economists and analysts have questioned whether the rise in Japanese stocks over the past two years is a bubble driven by a weak yen.
The stock market rally looked poised to continue, thanks to Ms. Takaichi’s criticism of the Bank of Japan’s interest rate hikes. On Friday, Ms. After Takaichi took the lead in the first round of polls, the yen soon weakened and Japan’s main stock index rose.
After Tokyo markets closed for the day, Mr. The yen traded at around 142 to the dollar on Monday, up from above 146 on Friday.
In remarks on Friday evening, Mr. Ishiba reiterated his belief that interest rate hikes, rather than cuts, are necessary to boost Japan’s economy, reduce inflation and stimulate sluggish consumer spending.
Mr. will be sworn in on Tuesday. Ishiba’s other key focuses include supporting Japan’s regional economies and encouraging the relocation of manufacturing sites back to Japan.
Major banks believe Monday’s market moves could signal the extent of major repercussions for the LDP election. In an attempt to calm investors over the weekend, Mr. Ishiba appeared.
Mr. Bank of Japan’s independence of interest rate decisions Barclays researchers wrote in a note that Ishiba may value. They predict interest rates will rise in January.
