Why Did Asian Markets Rally After Japan’s Prime Minister’s Shock Resignation?

Highlights:

• Asian equities surged, led by Japan’s Nikkei, despite political upheaval.

• A softer yen and expectations of fiscal easing invigorated investor sentiment.

• U.S. economic weakness boosted rate-cut hopes, underpinning regional markets.

• Bond markets roiled as long-term yields jumped, spotlighting Japan’s debt stress.

• All eyes now turn to LDP leadership contests and central bank direction.

Asia Markets & Currency Response
Asian stock markets advanced notably on Monday following Prime Minister Shigeru Ishiba’s surprise resignation. Japan’s Nikkei 225 led the rally, climbing between 1.0% and 1.8%. Elsewhere, South Korea’s KOSPI and Hong Kong’s Hang Seng posted modest gains of around 0.2%–0.3%, while Australia’s ASX 200 slipped by 0.3%. The broader Asia-Pacific index, outside Japan, ticked up approximately 0.4%.

The yen weakened sharply—trading down nearly 0.6% to 0.7% against the dollar, reaching around ¥148.4. This provided a boost for exporters and helped underpin stock market momentum.

U.S. Rate-Cut Optimism and Global Sentiment
Simultaneously, U.S. markets were buoyed by softer labor data, which fueled speculation of imminent Federal Reserve rate cuts—possibly a 25-basis-point move in September, with significant easing priced in through year-end. Futures tied to S&P 500 and Nasdaq indices rose about 0.2%–0.25%.

Gold hovered near record highs around $3,588 per ounce, while Treasury yields remained near five-month lows. Higher oil prices added further support, bolstering overall market mood and risk appetite.

Bond Market Reaction & Fiscal Concerns
Japan’s government bond market responded with volatility: yields on super-long JGBs surged—30-year notes hit 3.285%, and the 20-year climbed to levels unseen since 1999 at 2.69%.

Ishiba’s resignation stoked anxiety over Japan’s fiscal trajectory. His successor’s policy leanings—particularly toward renewed stimulus reminiscent of “Abenomics”—could reshape the bond outlook. Investors remain concerned about the sustainability of Japan’s heavy debt burden and the Bank of Japan’s ability to maintain credibility.

Political Transition and Market Implications
Ishiba, viewed as a fiscal hawk, stepped down amid mounting public frustration over the high cost of living and his party’s electoral setbacks. His resignation triggered a snap leadership election within the ruling Liberal Democratic Party (LDP), with key figures already entering the field.

Former Foreign Minister Toshimitsu Motegi launched his bid immediately, while frontrunners include Sanae Takaichi—reluctant to let the BOJ hike rates and in favor of fiscal looseness—and possible candidacies from Yoshimasa Hayashi and Shinjiro Koizumi. Markets are closely watching these developments for clues about future monetary and fiscal direction.

What Comes Next
Looking ahead, market participants are focusing on two pivotal dynamics: first, the outcome of the LDP leadership race and whether it steers policy toward aggressive stimulus or a return to fiscal discipline; second, the Bank of Japan’s reaction—especially at its approaching policy sessions, which may complicate efforts at normalization.

At the same time, global forces—the U.S. jobs and inflation data, rate-cut probabilities, and geopolitical developments—will continue shaping appetite for risk across Asian markets, currencies, and bonds.

As leadership uncertainty unfolds in Tokyo, investors will monitor how emerging policy shifts interact with already loose monetary settings and elevated government debt, to calibrate exposure to Japan and the broader region.