Yen bounces back as veteran lawmaker Ishiba wins PM contest

By Ankur Banerjee and Linda Pasquini

SINGAPORE/LONDON (Reuters) -The yen bounced on Friday, recovering earlier losses, after Japan's former defence minister Shigeru Ishiba won the leadership contest of the country's ruling Liberal Democratic Party and was set to become its next prime minister.

Ishiba is a critic of past monetary stimulus and told Reuters the central bank was "on the right policy track" with rate hikes thus far.

The yen gained more than 1% to 143.05 yen per dollar, from 146.49 earlier in the day, its weakest since Sept. 3.

Markets had braced for the victory of hardline nationalist Sanae Takaichi, a vocal opponent of further interest rate hikes, in one the country's most unpredictable leadership votes in decades.

"(Ishiba's victory is) a surprise to the market, which seems to have been bracing for a Takaichi victory," analysts at UBS said. "It's likely a relief for the BoJ as pressures on its hiking process should ease."

The yen rallied broadly, rising sharply against the euro, which fell 1.56% on the day to 159.305.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, noted that Ishiba had sounded more cautious recently, saying his country had yet to fully overcome inflation.

"The sharp strengthening of the yen following Ishiba's victory underlines that markets view his victory as clearing the way for further rate hikes," Thieliant said.

"To be sure, our own analysis shows that the government has less sway on monetary policy decisions than commonly thought. Nonetheless, his victory will probably be greeted with relief by BOJ policymakers," he said.

Elsewhere, the euro was down 0.45% at $1.1127 after data showed inflation in France and Spain rose less than expected, prompting traders to ramp up their bets on an October rate cut from the European Central Bank.

The derivatives market showed traders were attaching an almost 80% chance of a cut when the ECB meets next month, while a week ago, the chances were negligible.

(Reporting by Ankur Banerjee in Singapore and Linda Pasquini and Samuel Indyk in London; Additional reporting by Vidya Ranganathan Editing by Jamie Freed, Kim Coghill, Sonali Paul, Amanda Cooper and Alex Richardson)