Shi Po Mao wins the election, "igniting" expectations of a rate hike in Japan, Nikkei 225 futures plummeted during the trading session, triggering a circuit breaker at one point

Shi Po Mao unexpectedly elected as the Prime Minister of Japan, the Japanese Yen staged a major turnaround, soaring against the US Dollar, Japanese government bond futures fell, and the Nikkei 225 index suffered a heavy blow.

On the evening of the 27th, after Shi Po Mao was elected as the new leader of the Liberal Democratic Party of Japan, the Nikkei 225 index futures trading plummeted by more than 2000 points at one point and triggered a circuit breaker.

In the afternoon of the same day, former Secretary-General of the Liberal Democratic Party of Japan, Shi Po Mao, won the majority of votes in the second round of the party's presidential election. Prior to this, the market had been digesting the expectation of another candidate, Takashi Koshi, winning. She had previously stated earlier this week that she hoped the Bank of Japan would maintain loose monetary policy.

As is customary, the newly elected leader of the Liberal Democratic Party, Shi Po Mao, is expected to succeed as the Prime Minister through a parliamentary nomination election on October 1. The current Prime Minister of Japan, Fumio Kishida's term as the leader of the Liberal Democratic Party will end on September 30.

After experiencing an increase against the US Dollar earlier in the day, the Japanese Yen is now stable around 143 yen.

How will the changes in Japanese politics affect the Bank of Japan's policies?

Shi Po Mao's election has affected market expectations for the future policies of the Bank of Japan, especially regarding the sustainability of the central bank's monetary policy stance.

Earlier this week, Kazuo Ueda reiterated the Bank of Japan's position in a speech, stating that if the data supports it, the central bank will raise interest rates again, but will not rush to do so. Some analysts believe that his remarks indicate a low likelihood of policy action by the Bank of Japan at the next month's meeting.

Shoki Omori, Chief Trading Desk Strategist at Mizuho Securities in Tokyo, stated:

"Many Yen shorts have been hit, especially speculators and short-term funds. With Shi Po Mao set to become the next Prime Minister, all expectations regarding risk appetite and inflationary policies have evaporated. Clearly, many investors had expected loose policies to continue for a longer period, so they may have re-entered arbitrage trades or shorted the Yen, but now all shorts are being closed. The Bank of Japan will proceed with policy based on data in the future."

Some analysts believe that Shi Po Mao's hawkish stance may boost the Yen, and it is expected that the Bank of Japan may raise interest rates in the future, especially in December. Alex Loo, Macro Strategy Analyst at Daiwa Securities, stated:

"Shiromomo's past remarks indicate that he is a monetary hawk, hence the yen bulls are encouraged. Today's outcome strengthens our belief that the Bank of Japan will raise interest rates again in December this year, and the narrowing of the US-Japan interest rate differential could push the USD/JPY back to the 140 yen level."

Valentin Marinov, strategist at Oriental Bank, said:

"Shiromomo's unexpected victory may boost yen bulls, as this could trigger further expectations of policy normalization by the Bank of Japan, possibly as early as October.

In addition, any actions that may deviate from the fiscal radicalism of Abenomics could have some significant impact on yen carry trades. In particular, any attempts to reduce debt and/or a wave of corporate restructuring could in the long run stimulate repatriation flows to the yen, potentially impacting yen funding carry trades."

Homin Lee, Senior Macro Strategist at Lombard Odier Singapore Ltd., said:

"The new cabinet under Shiromomo's leadership will broadly support the Bank of Japan's gradual policy normalization plan, which should lift the yen in the coming months. Our base forecast is for the Bank of Japan to raise rates by another 25 basis points in December, with the USD/JPY further falling to 135 in the next 12 months."

Some analysts also believe that the market reaction has been excessive, and the fundamental outlook of the Japanese economy is unlikely to change suddenly in the short term. Hiromi Yamaji, CEO of JPX, said:

"The market's reaction to the LDP election results has been excessive, and we do not believe that the stock market and economic fundamentals will suddenly change. It is expected that Shiromomo will continue to implement stock market policies such as the NISA tax-free investment plan."