(Bloomberg) — Japanese stocks will likely tumble on Monday after Shigeru Ishiba’s surprise victory in the ruling party’s leadership race raised expectations that interest rates will increase.

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Nikkei 225 Stock Average futures sank 6% in Osaka following Ishiba’s selection Friday after trading in Tokyo had closed for the day. The Nikkei 225 had jumped 2.3% before the final result as traders bet on a victory by Sanae Takaichi, who opposes higher rates.

The equity market will likely have large swings in the near term until there’s more clarity around Ishiba’s policies, according to analysts. The yen rose sharply on Ishiba’s win. A stronger currency will likely drag down exporters while banks will likely get a boost on optimism their profits will increase with higher rates. Ishiba’s plans to increase Japan’s military strength could benefit the defense sector, according to some analysts.

“The beginning of the week is likely to be volatile,” said Rina Oshimo, a strategist at Okasan Securities Co. in Tokyo. “Since Ishiba has been advocating for fiscal consolidation and other measures, the yen’s appreciation may become a headwind for Japanese equities.”

Ishiba has said he supports the Bank of Japan’s independence and normalization path in principle, and that the country needs to defeat deflation. While the central bank is independent from the government, it has regularly been subject to political pressure. Ishiba called for the BOJ’s monetary easing to continue in an interview with Fuji TV on Sunday.

Ishiba, a former defense minister who’s set to become Japan’s new premier, also said that new tax exemption programs similar to the Nippon Individual Savings Account will be supported, and that he intends to dissolve Japan’s lower house early in his tenure. Ishiba was previously reported as saying he wanted to increase capital gains tax on investment income.

Bets Back on for BOJ Hikes After Ishiba’s LDP Win, Analysts Say

When Prime Minister Fumio Kishida took office in 2021, his proposals to raise taxes on capital gains led to a decline in the Nikkei 225 that was termed the “Kishida shock”. He quickly retreated on the plan, providing relief for the market. Helped by a weaker yen, optimism over corporate governance reforms and Warren Buffett’s endorsement, the blue-chip gauge rose to a record earlier this year.

But Japanese stocks became the epicenter of a global rout in August after the BOJ’s rate hike triggered a jump in the yen. While shares have pared some of their losses since then, the market remains vulnerable to gyrations in the yen’s moves. Ishiba has also advocated for supporting Japan’s rural economy.

“Domestically oriented stocks, especially those benefit from regional revitalization measures, will be preferred,” said Hirofumi Kasai, a senior strategist at Tokio Marine Asset Management Co. “The overall direction out of deflationary period won’t change.”

Morgan Stanley MUFG Securities Co. also recommends investors focus on domestic demand-oriented stocks, until concerns about growing corporate tax burdens are cleared. Goldman Sachs Group Inc. warns volatility will likely persist in the short term until Ishiba clarifies his stance “on areas of investor concern such as corporate governance reform and tax rates on financial asset income.”

Japan’s parliament is expected to confirm 67-year-old Ishiba as prime minister in a vote slated for Oct. 1. Investors’ attention will likely then turn to the timing for a general election, economic data and the US election.

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