Japan's Nikkei dives, JGB yields jump after Ishiba win
Incoming premier viewed as monetary policy hawk, despite recent toned-down comments
Yen surged after his victory on Friday, when stock and bond markets had closed
Banks were only winners among Tokyo bourse's 33 industry groups on Monday
Updates prices as of 0600 GMT
By Kevin Buckland
TOKYO, Sept 30 (Reuters) -Japan's benchmark Nikkei share average plummeted on Monday in reaction to a sharply stronger yen after perceived monetary policy hawk Shigeru Ishiba won a leadership contest to become the country's prime minister.
The Nikkei .N225 ended the day down 4.8% at 37,919.55, while the broader Topix index .TOPX shed 3.5%.
Japanese government bond yields jumped, with those on benchmark 10-year notes JP10YTN=JBTC rising 4.5 basis points (bps) to 0.85% and two-year yields JP2YTN=JBTC climbing 7 bps to 0.385%.
A critic of the Bank of Japan's extraordinary stimulus of the previous decade, Ishiba beat monetary-policy dove Sanae Takaichi in a close contest on Friday that was decided after share and bond markets had already closed. He is due to become premier on Tuesday.
Ishiba's current stance is less clear, as he told national broadcaster NHK at the weekend that "monetary policy must remain accommodative as a trend given current economic conditions."
At the beginning of August, he had said the BOJ "is on the right policy track" after the central bank's exit from negative interest-rate policy in March and its follow-up rate hike in July.
The picture is complicated further by Ishiba's reported choice of finance minister, Katsunobu Kato, who in May called for continued normalisation of monetary policy.
"This leadership change adds a layer of uncertainty" for the yen, said Charu Chanana, head of FX strategy at Saxo.
"There is a fair chance that Ishiba-san's hawkish comments could feed into BOJ's policy thinking," she said. "We still expect caution on further policy hikes ... but wage-price spiral suggests that the BOJ has room to normalize policy further."
The yen JPY=EBS surged about 1.9% on Friday before advancing a further 0.3% on Monday to be at 141.78 as of 0600 GMT.
A stronger currency crimps revenue at the country's many heavyweight exporters, and also makes Japanese shares more expensive for overseas investors.
Ishiba's backing of higher corporate and investment-income taxes poses another hurdle for equities.
However, the incoming premier is unlikely to want to stir much controversy initially as he leads his Liberal Democratic Party (LDP) into a snap election on Oct. 27.
"The financial tax issue is one that worries investors, but at this juncture I would say the Ishiba cabinet will focus on winning the snap election," said Shoki Omori, chief Japan desk strategist at Mizuho Securities.
"I don't think they want to show a hawkish position as of now, as the LDP's approval rate is very low."
Automakers tumbled on Monday, with Toyota Motor 7203.T sliding 7.6% and Honda 7267.T dropping 7%
Semiconductor-sector shares sank, led by chip-making equipment giant Tokyo Electron's 8035.T nearly 8% retreat.
The banking sector .IBNKS.T was the lone gainer among the Tokyo Stock Exchange's 33 industry groupings, advancing 1.85%. Lenders have been the biggest beneficiary of expectations for monetary policy normalisation.
Of the Nikkei's 225 component stocks, 212 fell and 13 rose.
However, Nomura Securities strategist Kazuo Kamitani said the bulk of the selling may have already run its course.
"To be honest, I was thinking that there would have been nothing strange about a much bigger decline in the Nikkei today," but the psychological 38,000 mark is emerging as a kind of floor, Kamitani said.
"My impression is there is a lot of support there."
Reporting by Kevin Buckland; Editing by Tom Hogue, Jamie Freed and Shri Navaratnam
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