Japan is once again at a political crossroads after Prime Minister Shigeru Ishiba announced his resignation on Sunday, September 7, 2025, thrusting the world’s fourth-largest economy into a period of uncertainty that has already rippled through global markets. Ishiba’s decision comes after weeks of mounting pressure following a second stinging election defeat and amid persistent calls from within his own Liberal Democratic Party (LDP) to step aside. As the country braces for a leadership contest, investors, politicians, and ordinary citizens alike are left wondering what comes next for a nation grappling with both domestic and international challenges.
At a press conference in Tokyo, Ishiba made his intentions clear. “Having seen the US trade negotiations through, I felt that now is the right time to stand down and give way to my successor,” he said, according to Bloomberg. He will remain in office until a new leader is chosen—a process that, given the current fractious state of Japanese politics, could take some time.
Ishiba’s resignation is far from a routine change of guard. Elected as LDP leader only last September, he has presided over a turbulent year marked by persistent inflation, a damaging political finance scandal, and a rice shortage that many have pinned on longstanding government policies. The July 2025 parliamentary elections dealt a major blow to his party, with new right-wing populist groups making significant gains and leaving the LDP a minority in both chambers of the Diet for the first time in decades, as The New York Times reported. Ishiba’s relatively centrist approach, it seems, alienated the party’s conservative base, who defected in droves to the populist Sanseito Party and similar movements.
At Sunday’s news conference, Ishiba was candid about the reasons for his departure. “I feel a great sense of regret,” he said, acknowledging that he had considered resigning since the July election setback but waited until the completion of fraught trade negotiations with the United States. “Resigning would have been absolutely unacceptable” during those talks, he explained. The agreement, which imposed a 15 percent across-the-board tariff on Japanese exports and included a pledge to invest $550 billion in the U.S. economy, left some details unresolved but was enough for Ishiba to feel he had fulfilled his duty.
The political vacuum has already had tangible effects on financial markets. On Monday, September 8, the Nikkei 225 jumped 1.5% and the Topix climbed 1% to a record high, according to CNBC. Yet, the Japanese yen slumped 0.64% to 148.33 against the US dollar, its lowest in more than a year against the euro and sterling, as reported by Reuters. Investors, wary of the policy uncertainty ahead, have also pushed Japanese government bond yields to new heights—the 30-year yield rose over 4 basis points to 3.272% after hitting a record high the previous week.
Charu Chanana, chief investment strategist at Saxo, captured the market mood: “With the LDP lacking a clear majority, investors will be cautious until a successor is confirmed, keeping volatility elevated across yen, bonds and equities. Near-term, that argues for a softer yen, higher JGB term-premium, and two-way equities until the successor profile is clear.”
The search for Ishiba’s replacement is already underway, and the list of contenders reflects the ideological tug-of-war now gripping Japanese politics. Shinjiro Koizumi, the 44-year-old agriculture minister and son of former Prime Minister Junichiro Koizumi, is widely seen as a reformer who might shake up the party’s ossified structures. Sanae Takaichi, a hard-line conservative and protégé of the late Prime Minister Shinzo Abe, is another frontrunner. Takaichi has openly criticized the Bank of Japan’s interest rate hikes and has called for amending Japan’s pacifist postwar Constitution to allow for a national defense force. Her socially conservative views—opposing same-sex marriage and supporting mandatory shared surnames for married couples—appeal to the party’s right wing.
Market watchers are already weighing the potential impact of these candidates. Richard Kaye, a portfolio manager at Comgest, told CNBC that Takaichi is “likely the candidate to drive growth and she will justify today’s market rally,” pointing to her pro-deregulation stance and opposition to further rate hikes. Yet, others warn that her policies could introduce new uncertainties, especially regarding Japan’s monetary policy and international standing.
Another name in the mix is Yoshimasa Hayashi, the current chief cabinet secretary, who is closely aligned with Ishiba and is expected to provide continuity if chosen. Meanwhile, former foreign minister Toshimitsu Motegi has also thrown his hat into the ring, as reported by Reuters. The LDP leadership contest is shaping up to be a battleground between those who want to preserve the party’s traditions and those who believe a bolder, more populist approach is needed to recapture the electorate’s trust.
The stakes are high. Japan is contending with rising right-wing populism at home and heightened unpredictability from its key ally, the United States. The LDP, which has governed for all but five of the last 70 years, now finds itself a minority party, its aging supporter base increasingly out of step with younger, urban voters. As Masato Kamikubo, a professor at Ritsumeikan University, put it to The New York Times: “Ishiba served as a bridge between the old politics and the new politics, and that may be his ultimate legacy.”
Throughout his tenure, Ishiba struggled to win over voters amid stubborn inflation—running above 2% for three years—and the lingering effects of political scandals. The rice shortage, in particular, became a flashpoint, with critics blaming government-imposed production curbs for the crisis. Ishiba’s hope, as he stated on Sunday, is that his successor will “make further progress on issues including increasing domestic rice production, solidifying relations with the United States, and encouraging firms to increase wages to help families cope with rising prices.”
He also warned of the dangers ahead if the LDP fails to regain public trust. “We have not yet been able to dispel the public’s distrust of politics,” Ishiba said. “I am increasingly concerned that if the Liberal Democratic Party loses public trust, Japanese politics will descend into easy populism.”
As Japan heads into the final quarter of 2025, the country faces a period of extended uncertainty, with analysts from Fitch Solutions’ BMI unit cautioning that, while the next LDP leader would ordinarily become prime minister, it is “theoretically possible for the opposition to band together under a rival candidate for the premiership.” The coming weeks will be pivotal, not just for Japan’s political future but for its role on the global stage.
For now, all eyes are on Tokyo as the nation waits to see who will step up to lead—and whether they can bridge the generational and ideological divides that have left Japan’s politics at a crossroads.
