Japan's prime minister has resigned. How did the yen and stocks react?

The Japanese yen fell and stocks on the country's stock market jumped in value after Japanese Prime Minister Shigeru Ishiba unexpectedly announced his resignation. Until recently, Ishiba had rejected calls to step down as head of government, saying he needed to first strike a trade deal with the U.S. and ensure its proper implementation. Political turmoil could also add to volatility in Japan's bond market, which has come under pressure due to a global sell-off in long-dated debt securities.

Japanese stock index Nikkei 225 at the end of trading on September 8 in Tokyo rose by 1.45% to 43,643.81 points. In the course of trading, the index climbed higher - by almost 2%, surpassing the record closing level.

The rise in stocks reflects investors' hopes that lingering political instability will force the Bank of Japan to hold off on raising interest rates, The Wall Street Journal noted. In addition, shares of local exporting companies were supported by the weakening of the yen against the dollar. The Japanese currency weakened 0.5% against the dollar on concerns that political risks will reduce both confidence in fiscal discipline and the chances of a rate hike by the Bank of Japan, WSJ and Bloomberg wrote.

Japan's 102nd Prime Minister Shigeru Ishiba announced his decision to step down on Sunday, September 7, taking responsibility for his party's election defeat. WSJ expects Japan's government bond (JGB) yields to continue to rise (and the price to fall) amid fears of an increase in supply if Ishiba's successor favors fiscal easing.

Yields on long-term Japanese government bonds rose after Ishiba's resignation: for example, 30-years added six basis points to reach a record level set last week, Bloomberg wrote. The difference in yields with five-year bonds exceeds what is seen in other major markets, the agency noted.

Former Minister of Internal Affairs and Communications Sanae Takaichi is considered one of the main contenders for the post of Japan's prime minister. She has been Ishiba's main rival in the race to lead the ruling Liberal Democratic Party (LDP), which has been in power almost continuously since its founding in 1955.

"With Ms. Takaichi stressing the need to continue [former Prime Minister Shinzo] Abe's political legacy, there's a possibility that a shift toward more aggressive fiscal policy and a delay in normalizing interest rates" will weaken the yen, the WSJ quoted Daiwa Securities strategist Kenta Tadaide as saying.

"The bottom line is that the yen will remain under pressure in the short term," said Commonwealth Bank of Australia strategist Carol Kong. She said markets are now "concerned that the next LDP leader will lean more toward fiscal expansion" (aggressively spending the budget or cutting taxes), Bloomberg reports.

Until the political situation clears up, uncertainty will prevent the Japanese central bank from resuming monetary tightening, despite signs of economic recovery and robust inflation. Barclays Bank has already moved its forecast for Japan's next rate hike from October to January 2026, WSJ notes.

This article was AI-translated and verified by a human editor