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Shigeru Ishiba, Japan’s incoming prime minister, is to call a general election for October 27 in a bid to secure a public mandate after his unexpected victory in last week’s ruling party leadership contest.
Ishiba revealed his plans for an election on Monday, one day before he was set to be formally sworn in by parliament and just minutes after the Tokyo Stock Exchange closed a chaotic session in which the Nikkei 225 index dropped 4.8 per cent.
Analysts said the decision to call a general election a year earlier than required represented an effort to consolidate the increasingly polarised Liberal Democratic party, whose approval ratings have fallen as households have struggled with rising living costs and sluggish real wage growth.
“It is important for the new administration to be judged by the general public as soon as possible,” Ishiba told a press conference.
Traders said the market reaction to Ishiba’s elevation to LDP leader last week was “extreme” but reflected fragile investor sentiment around the career politician who has expressed support for a vaguely defined, more distributive “new capitalism” but has never focused on economic matters.
Among the nine candidates who stood in the internal leadership race, political analysts had deemed the 67-year-old Ishiba the third most likely to win.
Stocks were led lower on Monday by property groups and exporters as the market assessed Ishiba’s apparent support for higher corporate taxes. He is also not expected to strongly resist the Bank of Japan’s plans to raise interest rates.
Ishiba is set to dissolve parliament’s lower house, where the ruling party holds 258 of the total 465 seats and is seeking to maintain a majority without the help of its smaller coalition partner.
Its main opponent, the Constitutional Democratic Party of Japan, holds 99 seats but has presented itself as a reinvigorated force under the new leadership of Yoshihiko Noda, who briefly served as prime minister more than a decade ago.
The Monday sell-off, which sent the Topix down 3.3 per cent, represented a reversal of the previous week’s rally, when shares had risen almost 5 per cent in anticipation of a victory for Sanae Takaichi, who has advocated for the BoJ to maintain its ultra-loose monetary policy and planned to follow the market-friendly “Abenomics” playbook.
Traders said the selling pressure had been compounded by disappointing economic data. Japan’s August industrial production numbers released on Monday showed seasonally adjusted output fell more than 3 per cent, a far sharper drop than the expected 0.5 per cent decline.
Industrial output is still lower than in 2023 and more than 10 per cent below its pre-pandemic level, noted Stefan Angrick, senior economist at Moody’s Analytics.
“Business forecasts don’t offer much reason for optimism. Projections point to lacklustre production in September and a modest rebound in October that will barely make back the losses incurred this month,” said Angrick. “Japan’s manufacturers are in bad shape.”
He added that a poor run of recent data would make life difficult for Ishiba and the BoJ.
Ishiba’s comments during campaigning suggested he was broadly supportive of the BoJ’s current trend of policy normalisation and interest rate rises, which have propelled the yen 12 per cent higher against the US dollar since July.
Much of Monday’s selling was focused on manufacturing companies and tourist-oriented retailers that were likely to be hit by a stronger yen.
Shares in the department store Isetan Mitsukoshi, a bellwether for luxury spending by foreign visitors, fell 11 per cent while its nearest rival, J. Front Retailing, dropped 8 per cent.