*

Incoming premier viewed as monetary policy hawk, despite

recent

toned-down comments

*

Yen surged after his victory on Friday, when stock and

bond

markets had closed

*

Banks were only winners among Tokyo bourse's 33 industry

groups

on Monday

(Updates prices as of 0600 GMT)

By Kevin Buckland

TOKYO, Sept 30 (Reuters) - Japan's benchmark Nikkei

share average plummeted on Monday in reaction to a sharply

stronger yen after perceived monetary policy hawk Shigeru Ishiba

won a leadership contest to become the country's prime minister.

The Nikkei ended the day down 4.8% at 37,919.55,

while the broader Topix index shed 3.5%.

Japanese government bond yields jumped, with those on

benchmark 10-year notes rising 4.5 basis points

(bps) to 0.85% and two-year yields climbing 7 bps

to 0.385%.

A critic of the Bank of Japan's extraordinary stimulus of

the previous decade, Ishiba beat monetary-policy dove Sanae

Takaichi in a close contest on Friday that was decided after

share and bond markets had already closed. He is due to become

premier on Tuesday.

Ishiba's current stance is less clear, as he told national

broadcaster NHK at the weekend that "monetary policy must remain

accommodative as a trend given current economic conditions."

At the beginning of August, he had said the BOJ "is on the

right policy track" after the central bank's exit from negative

interest-rate policy in March and its follow-up rate hike in

July.

The picture is complicated further by Ishiba's reported

choice of finance minister, Katsunobu Kato, who in May called

for continued normalisation of monetary policy.

"This leadership change adds a layer of uncertainty" for the

yen, said Charu Chanana, head of FX strategy at Saxo.

"There is a fair chance that Ishiba-san's hawkish comments

could feed into BOJ's policy thinking," she said. "We still

expect caution on further policy hikes ... but wage-price spiral

suggests that the BOJ has room to normalize policy further."

The yen surged about 1.9% on Friday before

advancing a further 0.3% on Monday to be at 141.78 as of 0600

GMT.

A stronger currency crimps revenue at the country's many

heavyweight exporters, and also makes Japanese shares more

expensive for overseas investors.

Ishiba's backing of higher corporate and investment-income

taxes poses another hurdle for equities.

However, the incoming premier is unlikely to want to stir

much controversy initially as he leads his Liberal Democratic

Party (LDP) into a snap election on Oct. 27.

"The financial tax issue is one that worries investors,

but at this juncture I would say the Ishiba cabinet will focus

on winning the snap election," said Shoki Omori, chief Japan

desk strategist at Mizuho Securities.

"I don't think they want to show a hawkish position as of

now, as the LDP's approval rate is very low."

Automakers tumbled on Monday, with Toyota Motor ( TM )

sliding 7.6% and Honda ( HMC ) dropping 7%

Semiconductor-sector shares sank, led by chip-making

equipment giant Tokyo Electron's ( TOELF ) nearly 8% retreat.

The banking sector was the lone gainer among the

Tokyo Stock Exchange's 33 industry groupings, advancing 1.85%.

Lenders have been the biggest beneficiary of expectations for

monetary policy normalisation.

Of the Nikkei's 225 component stocks, 212 fell and 13 rose.

However, Nomura Securities strategist Kazuo Kamitani said

the bulk of the selling may have already run its course.

"To be honest, I was thinking that there would have been

nothing strange about a much bigger decline in the Nikkei

today," but the psychological 38,000 mark is emerging as a kind

of floor, Kamitani said.

"My impression is there is a lot of support there."