Ishiba Shigeru’s Resignation Sparks Yen and Bond Sell-Off; Bank of Japan May Reconsider Rate Path

On September 7 at approximately 6:00 p.m. local time, Japanese Prime Minister and Liberal Democratic Party President Ishiba Shigeru held an urgent press briefing at the Prime Minister’s Residence to announce his decision to relinquish the LDP presidency. Earlier reports had indicated his intention to resign as Prime Minister. The announcement immediately pressured the yen, which traded sharply lower on Monday, and is expected to amplify volatility in both Japanese government bonds and equity markets that were already under strain.

In early trading on Monday, the yen fell 0.7% against the U.S. dollar and remained the weakest performer among G10 currencies last week amid mounting concerns over Ishiba’s departure. Conversely, the Nikkei 225 Index opened 1% higher and extended gains to 1.34% by mid-morning as investors weighed the political upheaval against policy continuity hopes.

Charu Chanana, Chief Investment Strategist at Saxo Bank in Singapore, observed that without a clear majority for the LDP, uncertainty over Ishiba’s successor would maintain upward pressure on volatility across the yen, bond yields, and equity prices. Until the new party leader is confirmed, she expects the yen to weaken further and long-term Japanese government bond yields to rise.

Prior to Ishiba’s resignation, worries about Japan’s ballooning fiscal deficit and his own political challenges had already pushed ultra-long bond yields near record levels, while the Nikkei had slipped from last month’s peaks. His departure threatens to reignite those concerns and trigger pronounced short-term market swings.

Attention now turns to potential successors and whether Abe Shinzo’s “Abenomics” playbook of aggressive monetary easing and fiscal stimulus will return. During Abe’s tenure, large-scale government spending and unprecedented Bank of Japan easing defined policy. Market participants widely anticipate that Ishiba’s heir may pursue similar measures, enhancing inflationary pressures.

Naka Matsuzawa, Chief Macro Strategist at Nomura Securities, suggested that investors will instinctively brace for a deeper bear market in Japanese government bonds, a softer yen, and modest equity gains, given the perceived risk of renewed reflationary policies. Although Ishiba had advocated a relatively prudent fiscal approach—which had assuaged some bond-market concerns—Japan’s public debt already exceeds 250% of GDP, the highest among developed economies. The Ministry of Finance reported last week that budget requests for the next fiscal year reached record highs for a third consecutive year.

Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust Asset Management, cautioned that the yields on ultra-long maturities could climb further in response to heightened fiscal uncertainty. Indeed, last week the 30-year JGB yield surged to 3.285%—an unprecedented level—while the 20-year yield touched 2.69%, its highest since 1999. Rising bond yields threaten to increase borrowing costs across government, corporate, and household sectors.

The July Upper House election, which saw opposition parties campaigning on tax cuts and higher spending gain ground, has already elevated the risk of further fiscal expansion. In that context, yield pressures may intensify as markets recalibrate.

Among leading contenders to replace Ishiba, Sanae Takaichi has emerged as a front-runner. She advocates maintaining the Bank of Japan’s ultra-low interest-rate policy to support economic recovery. Takamasa Ikeda, Senior Portfolio Manager at GCI Asset Management in Tokyo, noted that her leadership would likely boost equities by reinforcing expectations for increased government outlays.

After a decade of unconventional stimulus, the Bank of Japan has begun normalizing policy and trimming its government bond holdings. Rong Ren Goh, Portfolio Manager at Eastspring Investments in Singapore, remarked that this normalization trajectory—especially with a key BOJ meeting imminent—could be disrupted by Ishiba’s exit. Goh added that market participants worry the BOJ might lag global tightening, making the September and October policy meetings critical for setting the tone in both the yen and JGB markets.