Japan's Political Shift Rattles Markets: Yen Weakens as Investors Weigh Succession

SINGAPORE – The resignation of Japanese Prime Minister Shigeru Ishiba has triggered market volatility, with the yen weakening significantly against major currencies. Investors are now focused on the succession race and the potential for a new administration to pursue more expansionary fiscal and monetary policies.

The Japanese yen fell by over 0.5% against the US dollar, trading at 148.25. It also hit lows not seen in over a year against the euro and the British pound, reaching 173.91 and 200.33, respectively. Analysts believe the political uncertainty, combined with a lack of a clear majority for the Liberal Democratic Party (LDP), will keep volatility high across the yen, bonds, and equities. This uncertainty stems from the possibility of a successor who may favor looser fiscal and monetary policies, in contrast to Ishiba's stance.

Meanwhile, Japanese stocks have risen, with the Nikkei 225 gaining about 1.8% and the broader Topix index advancing more than 1%. This rally is largely attributed to the weaker yen, which benefits export-oriented companies, and the anticipation of new government stimulus. However, long-maturity Japanese government bonds (JGBs) are seen as particularly vulnerable to selling pressure due to heightened concerns over potential increased government spending.

In the US, the dollar showed signs of recovery after a significant drop on Friday following a disappointing jobs report. The nonfarm payrolls report indicated that US job growth slowed sharply in August, and the unemployment rate rose to 4.3%. This data has fueled expectations for a Federal Reserve rate cut later this month, with traders pricing in a small chance of a more aggressive 50-basis-point reduction. The weak US labor data also puts a spotlight on the Federal Reserve, which the Trump administration has repeatedly criticized for not cutting interest rates.

Against the dollar, the British pound and the euro each fell by over 0.1%, trading at $1.3492 and $1.1709 respectively, after experiencing gains on Friday. The dollar index has stabilized around 97.87.

The political shift in Japan, combined with the US economic data, has created a complex market landscape. While Japan's economy showed stronger-than-expected growth in the second quarter, expanding at an annualized 2.2%, this positive news was overshadowed by the political uncertainty. The next moves by the Bank of Japan are now highly dependent on who takes over as prime minister, with analysts expecting a "wait-and-see" approach for the immediate future.