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BOJ's policy meetings in focus after Ishiba's resignation

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Sanae Takaichi's policies could boost stocks with

increased

government spending

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BOJ's path to normalise rates may be disrupted by Ishiba's

exit

By Junko Fujita and Rae Wee

TOKYO, Sept 7 (Reuters) - Japan's stressed government

bond market and soaring stocks are set for more volatility on

Monday after the resignation of fiscal hawk Prime Minister

Shigeru Ishiba.

Yields on super-long Japanese government bonds (JGBs) have

already been hovering near record highs due to global concerns

about fiscal deficits and domestic political pressure on Ishiba.

Japan's Nikkei share gauge has recently slipped from last

month's record high.

Attention now focuses on potential successors for Ishiba and

a potential return to the "Abenomics" policies of the late

Shinzo Abe, Japan's long-time leader who presided over massive

fiscal stimulus and unprecedented monetary easing from the

central bank.

"A knee-jerk reaction of the markets would be a

bear-steepening of JGBs, weaker yen and mildly higher stock

prices as they see higher risks of an Abenomics-like

reflationary policy," said Naka Matsuzawa, chief macro

strategist at Nomura Securities in Tokyo.

Ishiba's relatively conservative fiscal stance has been seen

as a positive for the JGB market, where yields are still

relatively low globally, but concerns about Japan's massive debt

pile and widening fiscal deficits remain concerns.

The country's outstanding debt is nearly 250% the size

of its gross domestic product, the highest in the developed

world. Japan's budget requests for the next fiscal year amounted

to a record for the third straight year, the finance ministry

said last week.

"Yields on super-long bonds will likely rise from Ishiba's

resignation," said Katsutoshi Inadome, senior strategist at

Sumitomo Mitsui Trust Asset Management. "There has been an

upward pressure on super-long bond yields due to uncertainties

about fiscal conditions, and the pressure will increase."

The 30-year JGB yield last week jumped to an unprecedented

3.285%, while the 20-year yield hit 2.69%, the highest since

1999. The surge in yields spells ever higher borrowing costs for

the government, corporations and the public.

The JGB market was dealt a blow in mid-July when Ishiba's

coalition suffered a considerable defeat in upper house

elections. Outsider parties campaigning on tax cuts and

increased spending gained seats, and speculation has swirled for

weeks about pressure within Ishiba's Liberal Democratic Party

(LDP) for him to resign.

That all came to a head on Sunday, with Ishiba saying that

he must take responsibility for election losses and instructing

the LDP to hold an emergency leadership vote.

Among top contenders in the LDP leadership race is Sanae

Takaichi, who has advocated for the central bank to maintain

ultra-low interest rates to support the economic recovery.

"If Sanae Takaichi is going to be the successor, that's

positive for the stock market as she wants to boost government

spending," said Takamasa Ikeda, senior portfolio manager at GCI

Asset Management in Tokyo.

Japan's benchmark Nikkei share index hit a record high of

43,876.42 on August 19, riding a wave of optimism for corporate

governance reforms and investment in artificial intelligence. It

closed at 43,018.75 on Friday and analysts in a Reuters poll see

the index easing off that level to 42,000 by year-end.

The Bank of Japan is on a gradual path to normalise interest

rates and reduce its holdings of JGBs after last year ending a

decade of unconventional stimulus. That trajectory, particularly

in upcoming meetings of the BOJ, could be upset by Ishiba's

departure, said Rong Ren Goh, a Singapore-based portfolio

manager for Eastspring Investments.

"Market participants appear more concerned about the BOJ

falling behind the curve, so are likely to focus on the coming

two policy meetings in September and October to set the tone for

JGBs and the yen," Goh said.