(Bloomberg) — The yen reversed losses and surged against the dollar while stock futures fell after Shigeru Ishiba was voted leader of the Japan’s ruling party, beating a rival who opposed interest rate hikes.

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The currency strengthened as much as 1.3% to 142.96 on the announcement, after weakening as much as 1.2% earlier on Friday. Although the Bank of Japan is independent from the government, speculation of political pressure on monetary policy has seen currency traders betting on the election result.

Futures for Japan’s benchmark 10-year government bonds dropped, pointing to the prospect of higher yields. Contracts for the Nikkei 225 stock gauge fell to 38,570.00 as of 4:13 p.m. in Tokyo on the Chicago Mercantile Exchange. The Nikkei had earlier closed at 39,829.56.

Ishiba, a 67-year-old party veteran who has served in several senior roles including defense minister, is seen as supportive of the BOJ’s plan to gradually hike rates. He won against opponent Sanae Takaichi in the run-off vote. She had said recently it was “stupid to raise rates now.” Speculation before the results that Takaichi would win had led a drop in the yen.

“The market definitely seemed to be positioning for a Takaichi win,” said Andrew Jackson, strategist at Ortus Advisors. “The markets are reacting drastically to the news that Ishiba has won the run off, as seen by the surging yen.”

With the LDP election out of the way, the market is now shifting its focus to the narrowing interest rate gap between the US and Japan. Although Ishiba is more supportive of BOJ policy adjustments, Governor Kazuo Ueda has emphasized that the central bank isn’t in a rush to hike rates. Traders also remain uncertain on the speed and size of the Federal Reserve’s next moves.

“This leaves the yen back to be a yield-differential play,” said Charu Chanana, global markets strategist at Saxo Markets. “There’s room for strength, but the pace will depend on the Fed’s rate cutting cycle.”

–With assistance from Yasutaka Tamura and Kana Nishizawa.

(Updates with more more details and new prices)

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