Japanese PM's Resignation Sparks Market Panic: Yen and JGBs Sold Off Amid "Abenomics Return?" Fears

TradingKey - On September 7, Japanese Prime Minister Shigeru Ishiba announced his resignation on the eve of the Liberal Democratic Party's decision on whether to hold a temporary leadership election on the 8th, citing "unwillingness to cause party division."

Shigeru Ishiba stated at a press conference in Tokyo on Sunday: "Although I feel there are still many things I want to do as Prime Minister, I have made the difficult decision to resign...... I believe that if I continue to remain in office during the early voting process for leadership election, it might cause irreversible divisions within the party, which is certainly not my intention."

Shigeru Ishiba's resignation triggered a swift and severe market reaction. On Monday, USD/JPY fell as much as 0.7% for the day, continuing the downward trend from the previous week.

At the same time, selling pressure in the Japanese government bond market intensified, with 30-year Japanese government bond yields rising to 3.272% and 20-year yields climbing to 2.669%.

Investors expect that Japan's long-term yields will rise further. This is because Shigeru Ishiba maintained a relatively conservative fiscal stance during his tenure, and markets widely believe that his successor may restart the "Abenomics" model — that is, stimulating the economy through large-scale budgetary stimulus and ultra-loose monetary policy.

Japan's fiscal situation is already precarious, with its outstanding debt approaching 250% of GDP — the highest among developed nations.

More concerning is that budget requests for the next fiscal year have set a historical record for the third consecutive year, indicating significant inertia toward fiscal expansion. Ishiba's departure introduces even greater uncertainty to an already severe fiscal sustainability issue.

Katsutoshi Inadome, Senior Strategist at Sumitomo Mitsui Trust, warned, "Yields on super-long bond yields will likely rise from Ishiba’s resignation. He has strict fiscal discipline. There has been an upward pressure on super-long bond yields due to uncertainties about fiscal conditions, and the pressure will increase."

Michael Brown, Senior Research Strategist at Pepperstone, analyzed that rising political risks during the Liberal Democratic Party leadership race, as well as the possibility of new leadership calling for elections, are highly likely to lead to increased fiscal spending, "because the spending valve may open again in an attempt to attract voters in any opinion polls."

Brown also emphasized, "Developments will certainly not improve the already weakened bond auction demand, meaning the weak trend of long-term bonds and the steepening of the yield curve are unlikely to change in the short term."