(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 4.8% to 37,919.55 as of the market close on Monday, the most since Aug. 5, when shares plunged into a bear market. The broader Topix index dropped 3.5%. 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 gained 0.2% to 141.97 per dollar, while 10-year bond futures for December delivery fell 57 ticks to 144.65.

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.

Exporters were the heaviest drag on the Topix on concerns over the yen’s strength. The banking sector was the only gainer among 33 industry groups.

“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.”

Story continues

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, which Ishiba aims to hold on Oct. 27.

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

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.”

–With assistance from Aya Wagatsuma and Winnie Hsu.

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