Japan’s Prime Minister Resigns, Triggering Chain Reactions!

On Sunday local time, Japanese Prime Minister Shigeru Ishiba publicly announced his resignation. This means that Japan, the world’s fourth-largest economy, is likely to enter a prolonged period of policy paralysis.

Following Ishiba’s resignation, Japan’s Liberal Democratic Party (LDP) is expected to promptly initiate an internal presidential election. Former Minister of Economic Security Sanae Takaichi, Minister of Agriculture, Forestry and Fisheries Shinjiro Koizumi, and Chief Cabinet Secretary Yoshimasa Hayashi are currently seen as top contenders to succeed him.

Regarding the outlook for Japan’s market after Ishiba’s resignation, many market analysts share similar views: while his resignation was not entirely unexpected, other potential successors may adopt more expansionary fiscal policy stances, which could put additional pressure on Japanese long-term government bonds and the yen, making the Bank of Japan’s path to interest rate hikes more challenging.

"The market’s focus will be on the movement of (Japan’s) bond yields. But this is what we are seeing in other parts of the world—uncertainty in fiscal policy and high levels of government debt are a toxic combination—as we have seen in France."

"This selling pressure may initially come from the market. The market now needs to price in greater political risks, including not only the leadership race within the LDP but also the possibility of a general election if the new leader seeks appointment as prime minister."

There is also a fiscal perspective to consider, as all current top candidates for prime minister are likely to propose more expansionary fiscal positions than Ishiba, further pressuring demand for long-term government bonds, which has already declined significantly.

"For the (Bank of Japan), all this political uncertainty may further delay the tightening cycle. Previously, (BOJ) policymakers had already taken a very cautious approach to rate hikes, and with increased political uncertainty, they are now more likely to maintain this stance."