A New Prime Minister Shocked Japanese Investors. More Surprises Are in Store.

Anyone wondering what the dog catching the car looks like in economic terms should pay attention to current events in Tokyo.

Veteran politician Shigeru Ishiba’s fifth try at becoming Japan’s prime minister turned out to be the charm. The irony is that charm has never been the sharp-elbowed political loner’s thing.

Last week, as Ishiba angled to lead the ruling Liberal Democratic Party once again, the 67-year-old found himself apologizing for years of actions that “caused unpleasant experiences and made many suffer.”

Ishiba’s win came as a surprise to many. The Tokyo establishment is surprised, meanwhile, by Ishiba’s plan to hold a snap election on Oct. 27. It’s a bold move that suggests Ishiba is digging in to do big things.

But the surprises that really matter are yet to come as Ishiba details exactly what he wants to do with Asia’s second-biggest economy, a stock market at record highs, and a world pulsating with risks. Many of his policies might not exactly cheer global investors.

The way Ishiba bested nine candidates to replace Fumio Kishida speaks to a unique moment of political upheaval. To restore trust following a series of funding scandals within the LDP, Kishida dissolved the factions that normally pick the ruling party’s new president, who then becomes prime minister.

Amid the disorientation, Ishiba managed to draw a political “inside straight” of sorts, akin to Donald Trump’s unlikely Electoral College win in 2016. It allowed Ishiba to maneuver past the two favorites: Shinjiro Koizumi, 43, and Sanae Takaichi, 63.

Koizumi, son of a former premier, would’ve represented a generational shift; Takaichi would’ve been Japan’s first female leader. It turns out that in patriarchal Japan, it still helps to be the eldest man on the debate stage.

Unfortunately for economists and investors, Ishiba’s iconoclastic energy makes him something of a wildcard. Yet now that he’s caught the car, Ishiba’s longest-held positions on a number of key areas offer hints.

One is the Bank of Japan

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. In recent years, Ishiba stood out as a leading critic of a chronically weak yen. While most peers—Koizumi and Takaichi included—favor ultralow interest rates to reflate the economy, Ishiba supports tighter monetary policy. It’s well known that he thinks highly developed Japan should end its developing-nation-like obsession with an undervalued currency. Not only has it left Japan vulnerable to imported inflation, but it’s also damaging domestic confidence. Worse, perhaps, it’s deadened Japan’s animal spirits.

This week, Ishiba tried to throttle back on his previous support for a stronger yen. Even Ishiba must realize that “Japan is like a once-stellar company that now must cut its prices to be able to sell its products, and an ever-cheaper yen is the vehicle for cutting export prices in dollar terms,” as Richard Katz, author of The Contest for Japan’s Economic Future, puts it.

The last 25 years of zero rates removed all urgency for Tokyo to cut bureaucracy, modernize labor markets, incentivize a startup boom, and empower women. It took the onus off companies to innovate, restructure, and swing for the fences as they did in the 1980s.

Yes, Japan Inc. spent the last decade strengthening corporate governance and diversifying boardrooms. That, along with near-zero rates, pushed the Nikkei Stock Average to all-time highs this year. But risks abound should Ishiba prod the BOJ to raise rates at a moment when the economy is losing momentum.

Ishiba is a proponent of fiscal tightening, including higher taxes. If not handled skillfully and sequenced properly, simultaneous debt reduction and BOJ tightening could revive deflation.

Then there are the geopolitical landmines. Former Defense Minister Ishiba is a China hawk pushing for an “Asian NATO.” That will surely put Chinese leader Xi Jinping on the back foot. So will Ishiba’s support for the U.S. sharing nuclear weapons in Asia. “China also will find it hard to overlook his more assertive security posture and strong support for Taiwan,” notes Jeff Kingston, head of Asian studies at Temple University’s Tokyo campus.

Ishiba favors revisiting the Status of Forces Agreement pertaining to U.S. troops stationed in Japan. He argues the pact is problematically tilted to Washington’s benefit. For a Kamala Harris White House, this might pose a challenge. For a Trump 2.0 presidency, them’s fighting words.

During his administration, Trump got along with former Prime Minister Shinzo Abe, who lavished him with gifts and praise. Abe even nominated Trump for a Nobel Peace Prize. It’s doubtful Ishiba would supplicate himself as such, which could put Japan in harm’s way as Trump supersizes his trade wars.

Finally, it’s worth considering what all this means for Japan’s wage dynamics, something on which Nikkei investors are betting. Tokyo has sought to create a “virtuous cycle” of increased corporate profits, fatter paychecks, and faster economic growth.

If Ishiba’s past positions are any guide, investors could see a combination of higher BOJ rates, a sharply stronger yen, tightening fiscal policy, and, potentially, greater tensions with Beijing and Washington. At the same time, Ishiba is offering few specifics on how he plans to level playing fields, increase competitiveness and generate more economic energy and wealth from the ground up in top-down Japan.

There was great optimism earlier this year when Japanese labor unions scored the biggest pay gain in 33 years. But changing behavior in a nation still traumatized by decades of deflation requires workers believing gains will continue next year and beyond.

How likely are CEOs to boost wages if they fear a big pivot toward austerity and geopolitical drama? And how safe might investors feel as the “yen-carry trade” goes awry? Borrowing cheaply in Tokyo to bet on higher-yielding assets everywhere has been one the most crowded trades in global finance.

An “Ishiba Shock,” as economists call it, sent Tokyo stocks down nearly 5% Monday alone. Are global investors who’ve been rediscovering Japan next? This question will dog global punters as they wait to see how Ishiba plans to play his lucky hand. Even he doesn’t seem to know.

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