Japan’s Financial Markets Brace for Volatility Post-Ishiba Resignation

Japan’s government bond market and equities are gearing up for turbulence following the unexpected resignation of Prime Minister Shigeru Ishiba on 7 September 2025. The departure of the fiscal conservative has heightened concerns about Japan’s fiscal health, with the nation’s debt-to-GDP ratio at a staggering 250%, the highest in the developed world. This political shake-up, combined with global worries over fiscal deficits, has already pushed yields on super-long Japanese government bonds (JGBs) to historic highs, with the 30-year JGB yield reaching 3.285% and the 20-year yield hitting 2.69%, levels not seen since 1999.

Ishiba’s resignation comes at a critical juncture for Japan’s bond market, already under pressure from domestic and global economic challenges. “Yields on super-long bonds will likely rise from Ishiba’s resignation,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, citing uncertainties around Japan’s fiscal conditions. The country’s budget requests for the next fiscal year have hit a record high for the third consecutive year, amplifying fears of unsustainable debt levels. A shift towards reflationary policies, reminiscent of “Abenomics,” could further steepen the JGB yield curve, raising borrowing costs for the government and corporations. This bear-steepening, coupled with a potentially weaker yen, could reshape Japan’s economic landscape in the coming months.

Japan’s equity markets, particularly the Nikkei 225, are also on edge. The index, which hit a record high of 43,876.42 in August 2025, closed at 43,018.75 on Friday. Analysts suggest that a new leader like Sanae Takaichi, who advocates for increased government spending and ultra-low interest rates, could provide a boost to equities. “If Sanae Takaichi is going to be the successor, that’s positive for the stock market as she wants to boost government spending,” noted Takamasa Ikeda, senior portfolio manager at GCI Asset Management. However, the Bank of Japan’s gradual move to normalise interest rates may face disruptions, with upcoming policy meetings in September and October critical for setting market expectations.

The political uncertainty in Japan has broader implications for global capital markets, particularly for the yen and JGBs. “Market participants appear more concerned about the BOJ falling behind the curve, so are likely to focus on the coming two policy meetings,” said Rong Ren Goh, a portfolio manager at Eastspring Investments. A weaker yen could attract foreign investors to Japanese equities but may also increase import costs, adding inflationary pressure. As Japan navigates this leadership transition, investors are closely monitoring the Liberal Democratic Party’s emergency leadership vote and its potential to reshape fiscal and monetary policy. The outcome will likely influence global perceptions of Japan’s economic stability, with ripple effects across Asian markets and beyond.