After New Candidate and Future PM Announced, NIKKEI225 Loses & Yen Gains

Ishiba, former defense minister, was voted in as the new leader of the LDP party and will become the next prime minister.

The two-round primary produced a run-off between the veteran politician Ishiba and Takaichi, who was denied becoming Japan’s first female prime minister. The yen got an immediate boost, with USD/JPY rising to touch 142.80. While the stock market took a beating as the NIKKEI225 dropped 4.2%.

The Ishiba is seen as a promoter of a hawkish stance from the BoJ, possibly speeding up the tightening cycle of the central bank. Ishiba endorsed the BoJ’s second rate hike in August, saying that it was necessary to push down prices and boost industrial competition.

Takaichi on the other hand, has been quoted as saying that it would be stupid to raise interest rates now. At her recent campaign rally, she stated that rates need to be kept low to support a fragile economy.

The market was hoping for a possible win form the dovish Takaichi, and the reaction to being let down is evident. Also, decreasing rates in the U.S. and globally, and increasing rates in Japan will strengthen the yen.

At the same time, a stronger yen will limit Japanese companies’ competitiveness in exports and reduces profits. That said, the Ueda, BoJ governor, has recently pulled back from a previous hawkish stance.

However, political pressure in Japan on the central bank has been evident. As recently as this summer, various cabinet members called for yen intervention, and eventually the BoJ complied.

Technical View

The above chart for the NIKKEI225 shows a market lacking a clear trend. Prices are above the Ichimoku cloud. But the lagging line (yellow line) is still below the cloud, which indicates that the market hasn’t beaten the bear trend yet.

Today’s candle found support on a previous low of 37,599 (red line). While yesterday’s candle met resistance at a previous support level of 39,447 (purple line). To consider the bull trend has taken over, we would need to the lagging line above the cloud also.

That indication would technically put the market in a bullish trend. However, to consider a full-blown bull market we would need to see the market close above the all-time high of 42,465.

The market will find further support on the belly of the cloud, which coincides with the low of a previous dip of 36,675 (green line). The next major resistance line is at 41,109 (black line), which was a previous ATH that gave way to a major correction.