Here’s What Japan’s Leadership Change Means for Investors

It doesn’t say much about your popularity or your leadership skills if you step down from a position of power, and markets go up. But that’s exactly what is happening in Japan.

Stocks moved higher after Japanese Prime Minister Shigeru Ishiba announced his intention to step down. He will do so as soon as his Liberal Democratic Party (LDP) elects his successor.

Where will Japanese stocks head from here? It depends in part on who wins that party vote, with a staunch conservative facing off versus a reformer. We could have a very young leader, by Japan’s standards, or even the country’s first female leader, in what will prove a fascinating runoff.

Markets Move Higher as Ishiba Says He’ll Go

After Ishiba’s decision announced on Sunday, the blue-chip Nikkei 225 index moved 2.6% higher from Friday’s close to 10 a.m. Tokyo time Tuesday. The broad-market Topix rose 1.8%.

Despite the political instability and Ishiba’s unpopularity, Japanese markets inched to all-time highs in August. They’ve come off those slightly, and appeared to be losing their way. But they’ve rallied significantly since recent lows on September 3.

The Topix, with a greater emphasis on domestic plays, is now up 13.3% in 2025. The Nikkei, which captures more of the performance of major multinationals and exporters, is up 10.6%.

The difference is explained by the trade disruptions faced by the likes of Toyota Motor TM (T:7203), down 2.1% in 2025, and Mazda Motor MZDAY (T:7261), down 0.8%. But even these laggards have rallied since Japan reached a tariff agreement with the United States.

U.S. President Donald Trump inked an order last Thursday to set U.S. import taxes on Japan-made vehicles to 15%, down from 27.5%. The executive order, setting other Japanese import duties at 15% as well, is due to take effect within seven days, in other words by September 11.

Exit, Pursued by a Bear Market?

It’s actually this tariff agreement — don’t call it a trade deal — that allows Ishiba to exit if not with his head held high, then at least not in a deep bow of apology. Ishiba vowed to stay on after a disastrous showing in recent elections, perhaps hoping he could ride it out, but ostensibly because trade negotiations were still ongoing. Ishiba insisted continuity would help secure this pact.

Ishiba has been doomed since elections in July that saw the LDP lose its majority in the Upper House of Japan’s parliament. I wrote as much on July 22, just after the election took place over that weekend, and after I had spent 10 days witnessing the vote runup in Japan’s southernmost province, Okinawa.

The LDP has ruled virtually uninterrupted since it was founded in 1955. Only for two short spells, from 1993 to 1996 and 2009 to 2012, has any other party been in power.

But the LDP lost its majority in the more-powerful Lower House in October, and now manages a minority in both parts of the National Diet, Japan’s legislature. That has left it in stasis, relying on coalition partners to get anything done.

Few Leaders Last Longer Than a Year

There is sure to be a large degree of policy continuity regardless of the LDP’s choice. Japan had grown used to a virtual revolving door of prime ministers until Shinzo Abe was elected for his second spell in charge in December 2012.

Of the 18 prime ministers in Japan since 1990, 11 have lasted roughly one year. Although Abe went on to become Japan’s longest-serving postwar leader, with almost nine years at the top in total, he too had spent just a year in office when he first took power in 2006.

Ishiba leaves just as his first-year anniversary in office approaches on October 1. He was already unpopular before the parliamentary losses, but his position became untenable, given the voices from within his own party calling for his ouster.

Even his allies ultimately called on Ishiba to step down ahead of an internal vote that was due on Monday. They fear a deeper schism within the LDP, which has traditionally split into different blocs of influence.

Ishiba’s popularity suffered as several senior party members resigned in scandal, and as citizens contend with rising living costs. Prices for rice, the ultimate symbolic food in Japan, have doubled, and inflation has finally taken hold, leading to price rises.

Inflation Takes Hold

The central Bank of Japan (BOJ) has for decades struggled to secure any kind of price rises at all within Japan. Since the Japanese asset bubble burst in the early 1990s, there have been 15 years in which the country ended up with full-year deflation, a negative inflation rate, which is devastating for an economy. Why buy anything as a consumer or invest into any new operations as a company now, when next year it will be cheaper to do exactly the same?

But the BOJ has finally got its wish. Inflation crested as high as 4.0% in January, and has now stayed above the BOJ’s target rate of 2.0% for three years. It is a shock to the Japanese consumer’s system for companies to have the temerity to raise prices. But with Japan importing almost all its oil and many of its industrial inputs and ingredients, that is proving unavoidable.

Mild inflation can be a positive — so long as it is also accompanied by higher wages. The BOJ has said it would only be comfortable with prices rising so long as household income is also on the up. That should now be occurring, with average cash earnings up 4.1% in Japan as of July, but there’s always a lag before raises kick in, while consumers notice immediately if the price of rice shoots sky high.

The Main Contenders

There are two main contenders to take the country’s top post. One is the man tasked with bringing rice prices under control, the current agriculture minister Shinjiro Koizumi, the son of Junichiro Koizumi, a popular, reform-minded prime minister who served from 2001 to 2006. At 44, the younger Koizumi would be a dynamic presence compared with the men who succeeded Abe: Yoshihide Suga (now 76), Fumio Kishida (68) and Ishiba (also 68).

The other likely candidate would break new ground in a different way. Sanae Takaichi (64) would be the first woman to take the helm in Japan, and is a staunch conservative as well as former protégée of Abe. She finished first in the first round of voting to select the LDP leader in 2024, but then lost in a runoff with Ishiba.

Japanese bond yields fell on word Takaichi would be running, since she favors heavier government stimulus and monetary easing, at a point the BOJ is looking to raise interest rates. Takaichi was a heavy backer of the “Abenomics” policies to reflate Japan’s economy and push through corporate-governance reforms, and she has criticized the BOJ for raising interest rates.

Ishiba, on the other hand, is a fiscal hawk who had cleared the BOJ to gradually increase interest rates. With Takaichi in the running, the betting odds of a BOJ rate hike in October have sunk to 20%, from a 46% likelihood weeks back.

We have had few insights into Koizumi’s thinking on monetary policy. But he is an advocate of deregulation, like his father. There are some 18 other lawmakers who reportedly see themselves as potential candidates, and their participation may sway the decision by stealing away votes from either the Takaichi or the Koizumi camp.

The LDP is due to vote on Ishiba’s successor on October 4. The new party leader would then seek parliamentary approval before becoming prime minister. That means any new administration may only take form in mid-October, shortly before the BOJ meets from October 29-30.

Given the uncertainties on global trade, the BOJ will be in no hurry to force through rate hikes, even if its long-term stance is toward fiscal tightening. The central bank will also be looking for the impact on the Japanese economy from higher U.S. tariffs. On the plus side, Japan’s economy expanded at a 2.2% annualized rate for the June quarter, government data showed on Monday, up far faster than the initial reading of 1.0% growth for what’s now the world’s fifth-largest economy.

One thing is for sure: Given the challenges facing the LDP, whoever wins the election to replace Ishiba will have to fight for their political future, and if they want to have any chance at all to stay in power for more than one year.