A political earthquake has rocked Japan, as Prime Minister Shigeru Ishiba, battered by a series of humiliating election setbacks and facing an internal party rebellion, announced he will step down.
The stunning resignation ends a brief and troubled tenure, plunging the world’s fourth-largest economy into a period of deep uncertainty and setting in motion a fierce and unpredictable race to succeed him.
The announcement, delivered at a press conference in Tokyo on Sunday, was a reluctant admission of defeat. “While I feel there are still things I wish to do as premier, I have made the difficult decision to step down,” Ishiba said.
He acknowledged that if he had continued to cling to power, it “could have created an irreversible division within the party, which is certainly not my intention.”
A market on edge, a legacy in question
The market reaction was immediate and severe. The Japanese yen, a traditional safe haven, slid 0.7 percent against the dollar in early trading as a new wave of political instability washed over the nation.
While the weaker currency provided a tailwind for Japanese stocks, the country’s fragile bond market came under intense pressure, with yields on long-term debt, which had already hit multi-decade highs last week, seen as particularly vulnerable.
The core of the market’s anxiety is the fear that Ishiba’s departure will spell the end of fiscal discipline.
“Prime Minister Ishiba was known for his strict stance on fiscal discipline,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.
“While it remains unclear who will become the next prime minister, it’s difficult to envision anyone with a fiscal discipline stance better than or even equivalent to his.”
Ishiba attempted to frame his exit as a matter of timing, stating that having seen the contentious U.S. trade negotiations through, he felt it was “the right time to stand down and give way to my successor.”
The signing of the executive order by President Donald Trump last week, which finalized the deal, does provide Ishiba with a tangible, if modest, legacy to walk away with after a turbulent year at the helm.
The succession scramble: a battle for the soul of the party
Now, a frantic and high-stakes scramble to replace him has begun. The ruling Liberal Democratic Party (LDP) will now hold a leadership race, a contest that will be a battle for the soul of the party and the future direction of the country.
Potential candidates are already jockeying for position.
They include Sanae Takaichi, a former internal affairs minister from the party’s right wing who favors more stimulus and a cautious approach to interest rate hikes.
Her potential victory is the market’s nightmare scenario.
“If Ms. Takaichi is appointed, bond selling could intensify due to the risk of a credit rating downgrade,” warned Inadome. In that scenario, “we could see a triple dip: falling bond prices, a weaker yen, and declining stock prices.”
Other potential contenders include Shinjiro Koizumi, the son of a popular former prime minister who could give the LDP a fresher, more appealing face, and a host of other party veterans.
While the LDP’s dominance in parliament has traditionally all but guaranteed that its leader will become prime minister, the party’s recent election losses have fractured the Diet, injecting a new and unpredictable element into the race.
The next leader will face a daunting array of challenges, from global trade headwinds to simmering resentment at home over the soaring cost of living, a challenge that proved too great for his predecessor to overcome.
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