Japanese stocks plummet, the result of overly optimistic market expectations

Shi Po Mao's "upset" victory breaks market's loose expectations, causing a sharp drop in Japanese stocks.

On Monday, September 30th, due to Shi Po Mao's unexpected victory over Takashi Yamano in the Liberal Democratic Party presidential election, investors were forced to reduce their positions based on the earlier expectation of Yamano's victory. The market had originally bet that if Yamano became the new prime minister, it would encourage the Bank of Japan to maintain its low interest rate policy and implement more monetary stimulus measures.

Shi Po Mao supports the gradual departure of the central bank from ultra-low interest rate policies. After winning the leadership of the Liberal Democratic Party, the market is now betting again on the possibility of the Bank of Japan raising interest rates.

Today, the Nikkei 225 index closed down 4.8% at 37,919.55 points on Monday, marking the largest single-day decline in the Japanese stock market since entering a bear market on August 5th. The TOPIX index fell by 3.5%.

Analysts Hideyuki Sano and Momoka Yokoyama stated that the Nikkei 225 index's decline of 1.3% more than the TOPIX index indicates that the selling of Japanese stocks is mainly driven by short-term speculators who prefer trading stocks with higher liquidity and volatility in the Nikkei 225 index.

Today, the yen rose against the dollar by 0.2% to 141.97 at one point; the 10-year bond futures for December delivery fell by 57 basis points to 144.65 at one point.

Due to the strength of the yen, export companies had the biggest drag on the TOPIX index. Among the 33 sectors, the banking sector was the only one that rose.

Kohei Onishi, Senior Investment Strategist at Mitsubishi UFJ Morgan Stanley Securities, stated:

"The market's expectations for Yamano's victory were already reflected in the three consecutive rises in the Japanese stock market before today's decline. Today's drop is not surprising, it's just a temporary adjustment. Investors buy Japanese stocks mainly due to expectations of inflation, wage increases, and market reforms, rather than based on loose monetary policies. The market will refocus on the fundamentals."

Mitsubishi UFJ Morgan Stanley recommends that investors focus on domestically oriented Japanese stocks until concerns about increased corporate tax burdens are alleviated. Goldman Sachs, on the other hand, warns that short-term volatility may persist until Shi Po Mao clarifies his stance on corporate governance reform and financial asset income tax rates.

How will Japan's monetary policy develop in the future?

Shi Po Mao has talked less about monetary policy and tax policy. Based on previous information, Shi Po Mao has called for greater transparency in the normalization of the Bank of Japan's policy and emphasized promoting local economic development through government spending to address the issue of declining populations in rural areas. Yugo Tsuboi, Chief Strategist at Daiwa Securities, stated:

"Before the election, he did not talk much about monetary policy or tax policy on some TV programs. He may have avoided discussing these policies temporarily to prevent market anxiety." However, what can be confirmed is that Shiba Takamori advocates normalizing interest rates and holds a positive stance on fiscal consolidation. Therefore, the market is concerned that after Shiba Takamori takes office, there may be a significant reduction in Abenomics.

However, according to Kyodo News, Kato Katsunobu will become the next Minister of Finance, and he has always been a supporter of "Abenomics." This partially alleviates the market's concerns.