Nikkei In Transition: Japan’s PM Steps Down, The Market Reacts

Japanese Prime Minister Shigeru Ishiba announced his resignation over the weekend, bowing to weeks of mounting pressure following his party’s defeat in the national election late last year. The move marks a pivotal shift in Japan’s political landscape, creating both excitement and uncertainty for investors and policymakers.

Markets initially reacted with optimism. The Nikkei 225 jumped 1.45%, closing at 43,643.81, while the Topix climbed 1.06% to a record 3,138.2, as investors bet on a fresh wave of pro-growth policies under Ishiba’s potential successors. Analysts say the sharp rally reflects renewed expectations that new leadership could bring a more market-friendly agenda.

Two names have already emerged as front-runners: Koizumi Shinjiro, the agriculture minister and son of a former prime minister, and Sanae Takaichi, a close ally of the late Shinzo Abe. Takaichi, in particular, has drawn investor interest given her preference for deregulation and growth-focused reforms over aggressive rate hikes. Some analyst feel that she might have a more pro-business approach in her policies which could support the present rally.

However, beneath the optimism lies economic fragility. The yen weakened 0.64% to 148.33 per dollar, underscoring investor caution, while Japanese government bond yields climbed further, with the 30-year yield hitting 3.272%. Analysts attribute the surge to persistent inflation, tighter monetary policy, and lingering fiscal uncertainty. Rising borrowing costs may constrain fiscal manoeuvrability for whoever takes office.

Where the USDJPY is trading now

Looking ahead, the resignation injects a new layer of political uncertainty into Japan’s economy. While the ruling Liberal Democratic Party is expected to choose Ishiba’s successor, the market is of the view that we could see more uncertainty heading into Q4 2025, raising the possibility of an opposition challenge if rival forces unite.

For now, investors appear to welcome the prospect of reform-minded leadership. Yet as bond yields climb and the yen weakens, markets are signalling that Japan’s next leader will face a delicate balancing act: reassuring investors while navigating inflation, fiscal risks, and political fragmentation.

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