(Bloomberg) — Japanese stocks tumbled after Shigeru Ishiba’s surprise victory over Sanae Takaichi in the ruling party’s leadership race wrongfooted investors who had bet on a boost from more monetary stimulus from his rival.

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The Nikkei 225 Stock Average slid as much as 4.7% in early trading after Ishiba’s selection forced investors to pare positions that had been built on speculation Takaichi would become Japan’s new prime minister and encourage the Bank of Japan to keep interest rates low. The yen edged 0.3% lower to 142.68 per dollar after surging about 1.8% on Friday, while 10-year bond futures for December delivery fell 0.70 to 144.52.

The Nikkei underperformed the Topix by more than one percentage point, a sign that the selloff was driven by short-term speculators, who prefer to trade the Nikkei because of its high liquidity and volatility.

“There’s no surprise in today’s fall given how much the market had rallied in the last several sessions on hopes that Takaichi would win,” said Kohei Onishi, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “This will be a temporary move. Investors have been buying Japanese stocks on hopes about inflation, wage hikes and market reforms — not on BOJ easing. The market will go back to focus on fundamentals.”

Ishiba in general has remained supportive of the central bank continuing its path away from ultra low rates in contrast to Takaichi, who characterized further rate hikes for now as “stupid.”

Kyodo News reported that Katsunobu Kato is set to become the next finance minister, a move that is seen to ease worries that Ishiba may radically scale back some of former Prime Minster Shinzo Abe’s reflationary policies. Kato has been a supporter of Abenomics.

Ishiba has called for more clarity on the BOJ’s plans to normalize policy, and emphasized greater development of regional economies to tackle depopulation in rural areas, aided by government spending.

“He didn’t talk much about monetary policy or tax hikes when he appeared on some TV programs during the weekend,” said Yugo Tsuboi, chief strategist at Daiwa Securities. “He is probably refraining from talking about policies that make markets nervous ahead of a likely election.”

Ishiba may call for a general election on Oct. 27, public broadcaster NHK said.

Exporters were the heaviest drag on the Topix as the yen’s strength dimmed the outlook for profits. Banks, which sank last week on speculation Takaichi would win, rose.

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 market relief. Helped by a weaker yen, optimism over corporate governance reforms and Warren Buffett’s endorsement, the 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. 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.

–With assistance from Aya Wagatsuma and Winnie Hsu.

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