Japan stocks rally, yen slides as PM Ishiba’s resignation sparks fiscal jitters

Japanese stocks surged on Monday, while the yen weakened sharply after Prime Minister Shigeru Ishiba’s resignation sparked heightened uncertainty over the country’s fiscal outlook.

The Nikkei 225 benchmark rose 1.8% and was back near record highs hit in mid-August. The broader TOPIX index rose 0.9%.

The yen’s USD/JPY pair, which gauges the amount of yen required to purchase one dollar, surged 0.7% to 148.44 yen in morning trade. Weakness in the yen came despite a substantially softer dollar.

Stock gains and losses in the yen were driven chiefly by bets that heightened political uncertainty in Japan will keep the Bank of Japan from hiking interest rates anytime soon.

While the central bank has maintained a somewhat hawkish stance, especially amid sticky domestic inflation, it has not hiked rates since January this year on uncertainty over the Japanese economy.

This uncertainty rose sharply on Sunday after Ishiba announced his resignation, taking responsibility for a crushing July election loss suffered by his Liberal Democratic Party-led ruling coalition.

Ishiba also signaled that his resignation was timed to come after Japan had secured a trade deal with the United States.

The prime minister’s resignation heralds a period of political uncertainty for Japan, with markets now watching for whether Ishiba will be replaced with a less fiscally conservative candidate.

LDP veteran Sanae Takaichi, who is among the potential candidates considered for prime minister, has repeatedly criticized the BOJ’s rate hikes, while other potential candidates have also called for more fiscal spending and lower interest rates.
Still, revised gross domestic product data released on Monday showed the Japanese economy grew more than initially estimated in the second quarter.