The "Ishiba Shock"
The Japanese stock market saw a 5% decline following Shigeru Ishiba's appointment as prime minister, driven by rising investor uncertainty over his leadership. Concerns about the potential impact on Japan’s economic policies and international relations further eroded market confidence.
Tokyo's stock market fell by 5% on September 30th, following Shigeru Ishiba’s victory in the race to become president of Japan's Liberal Democratic Party (LDP). As the LDP holds a parliamentary majority, Ishiba was confirmed as the new prime minister on October 1st, 2024. However, his victory has shaken financial markets, sparking concerns about his economic policies and the potential changes in Japan’s monetary strategy.
The "Ishiba Shock"
The Nikkei stock index dropped by nearly 5% on September 30th in what has since been called on X "Ishiba shock" (石破ショック). The sharp stock market decline came in response to the yen's sudden surge following Ishiba’s victory over Sanae Takaichi, an advocate of fiscal expansion and monetary easing. The yen strengthened from above ¥146 to about ¥143 to the dollar after the election results were announced, raising concerns for Japan's export-oriented companies.
Major Japanese companies such as Toyota, Hitachi, and Mitsubishi Estate saw steep declines in their stock prices, dropping 7.85%, 6.36%, and 8.82% respectively. Isetan Mitsukoshi and SoftBank fared even worse, with stock prices plunging by 10.64% and 7.52%. The sudden rise in the yen, paired with fears of rising interest rates, disturbed investor confidence, particularly in companies reliant on international trade. Higher interest rates and a stronger yen could erode the earnings of exporters and make borrowing more expensive for businesses and consumers alike.
Economic Policy Confusion
Prime Minister Ishiba's recent remarks have added further uncertainty to the financial markets. On the evening of Wednesday, October 2nd, Ishiba met with Bank of Japan (BOJ) Governor Kazuo Ueda and afterward toldJapan Times reporters that “he does not believe the country is currently in an environment warranting an additional interest rate hike”. This shift came as a surprise because Ishiba had previously been viewed as supportive of rate increases.
In the past, Ishiba had been critical of Abenomics, a set of economic policies championed by former PM Shinzo Abe, which involved massive monetary easing. Ishiba’s criticisms of the BOJ’s prolonged monetary accommodation, including his remark that "the Japanese economy will not be cured with unprecedented monetary accommodation," positioned him as a potential advocate for tighter policy. This comment, aimed at reassuring markets ahead of the upcoming October 27th election,caused the yen to weaken.
The inconsistency between Ishiba’s earlier stance and his post-meeting raised questions about the stability of his economic approach.
Ryutaro Kono, chief economist at BNP Paribas Securities Japan, criticized Ishiba's remarks after the meeting with Ueda, suggesting that a Prime minister “should refrain from making remarks that could violate the BOJ law”. Kono added that political pressure on the BOJ could lead to a further weakening of the yen and increased inflation, harming consumers.
Fiscal Policy and International Relations
In addition to his monetary stance, PM Ishiba has announced plans for fiscal policy aimed at addressing the rising cost of living, particularly for low-income households. He has pledged to create an economic package that will cushion the economic blow of inflation while maintaining support for Japan’s economic recovery.
On the international front, Ishiba has made clear that Japan faces significant security challenges. He intends to seek closer alliances with friendly nations, particularly the United States, while advocating for more balanced relations, including greater oversight of U.S. military bases in Japan. One of Ishiba’s more controversial ideas is the creation of an Asian version of NATO to deter China.
Political Scandals
In addition to navigating financial markets and security concerns, Ishiba inherits a political landscape tarnished by scandals. The LDP has faced criticism over the influence of the Unification Church within the party, as well as accusations of under-reported political funding by certain factions. These controversies severely weakened the political standing of Ishiba’s predecessor, Fumio Kishida, who announced in August that he would not seek re-election as LDP leader.
The fallout from these scandals continues to fuel public distrust in the government, creating further challenges for Ishiba as he seeks to lead both the party and the country through turbulent times.
The LDP nearly elected Takaichi Sanae, a “worse leader,” according to The Economist. Takaichi won the first round of the leadership vote but fell just behind Ishiba. Takaichi, a right-wing candidate, downplays Japan's wartime atrocities and supports controversial actions like visiting the Yasukuni Shrine, which could worsen relations with China and South Korea. She advocates for a significant increase in defense spending without a clear funding plan and supports maintaining a law requiring married couples to share the same surname, a rule seen as outdated and sexist, according to The Economist. Despite her loss, her platform reflects the LDP's more conservative views.
Future ahead
Shigeru Ishiba’s nomination has already left a significant mark on the financial markets, with the initial "Ishiba shock" reflecting investor concerns about his economic policies. As the new prime minister settles into his role, he must strike a delicate balance between managing Japan's monetary policy, ensuring fiscal support for the economy, and addressing the scandals that have shaken the LDP.
While Ishiba's leadership signals a shift in Japan’s economic and political direction, the long-term impact on the markets and the nation’s international relations remains uncertain. Whether he can restore confidence in both the markets and his administration will be critical to his success moving forward.