Prime Minister Shigeru Ishiba announced his resignation on September 7, 2025 in Tokyo, setting up fresh market volatility across Japan’s long-dated government bond market and equity benchmarks. Super-long Japanese government bond (JGB) yields have been trading near multi-decade highs, while the Nikkei has eased from an August record. Investor attention is shifting to possible successors within the ruling Liberal Democratic Party and whether a return to large-scale fiscal stimulus — often linked to “Abenomics” — could follow. The Bank of Japan’s upcoming policy meetings in September and October are now central to how markets price risk in bonds, the yen and stocks.
Key takeaways
- Prime Minister Shigeru Ishiba resigned on September 7, 2025, and instructed the LDP to hold an emergency leadership vote.
- Super-long JGB yields surged last week, with the 30-year at 3.285% and the 20-year at 2.69% — the latter a level unseen since 1999.
- Japan’s public debt stands at about 250% of GDP, the highest among advanced economies, while budget requests set a record for a third consecutive year.
- The Nikkei hit a record 43,876.42 on August 19, 2025, but closed at 43,018.75 on the most recent Friday, and polls forecast some year-end softening to near 42,000.
- Potential LDP successors such as Sanae Takaichi have advocated looser policy and more fiscal support, a stance markets view as equity-positive but bond-negative.
- Market participants expect the BOJ’s September and October meetings to be pivotal in setting the tone for JGBs and the yen amid political change.
Background
Ishiba had been regarded as relatively conservative on fiscal policy compared with some factional rivals, and his stewardship was seen by some investors as a stabilizing factor for long-term borrowing costs. His coalition suffered significant losses in mid-July upper house elections, where parties promising tax cuts and bigger spending picked up seats, intensifying pressure inside the LDP. That electoral outcome sharpened debate inside government over fiscal strategy at a time when Japan’s debt-to-GDP ratio is nearly 250% and budget requests this fiscal cycle hit a new record for the third year running. Global investors, already attentive to high debt loads and aging demographics, have pushed yields on longer-maturity JGBs higher as uncertainty about Japan’s fiscal path increased.
The broader backdrop includes a gradual pivot by the Bank of Japan away from the decade-plus of extraordinary monetary easing that characterised the post-2013 era. Markets have priced a slow normalization of policy and a reduction in BOJ holdings of JGBs since last year, but those plans could be complicated by a change in the political leadership that favors bigger fiscal packages. Equities have been driven recently by hopes for governance reform and corporate investment in technologies such as artificial intelligence, which helped lift the Nikkei to its August high. At the same time, the interaction of fiscal expansion and a central bank still managing an exit raises questions about the yield curve and the cost of funding for governments and corporations alike.
Main event
On September 7, 2025, Ishiba told reporters he would take responsibility for the LDP’s election setbacks and asked the party to organise an emergency leadership contest. LDP factions immediately began positioning, and market participants began re-pricing the likelihood of different successors, focusing particularly on factions that support renewed fiscal expansion. The immediate market move has been upward pressure on the longest-dated JGB yields: the 30-year yield touched 3.285% last week and the 20-year reached 2.69%, levels that amplify interest-rate risk for long-dated borrowers.
Among potential successors, Sanae Takaichi has received attention for her advocacy of policies that would sustain very low interest rates to support the recovery while expanding government spending. Asset managers and strategists said such a policy mix could lift stock valuations but would likely steepen the JGB yield curve and weaken the yen. The Nikkei, which scored 43,876.42 on August 19, has already retraced some gains and closed at 43,018.75 on Friday as investors weigh these policy trade-offs.
Market strategists flagged the coming BOJ meetings in September and October as the next focal points for setting expectations. If the BOJ delays or slows its pace of normalization in response to political shifts, that could temper upward pressure on yields; conversely, any sign it continues reducing bond holdings could accelerate yield increases, particularly at the long end. Foreign and domestic participants are monitoring order flows in super-long papers that are especially sensitive to fiscal-signalling and large institutional allocations.
Analysis & implications
The immediate macroeconomic trade-off is straightforward: more aggressive fiscal stimulus improves growth prospects and raises equity risk appetites, but it also increases sovereign borrowing and strains the long end of the yield curve. With public debt near 250% of GDP, additional deficit financing would push market scrutiny higher and could raise funding costs for the government and private borrowers. Bond investors will demand compensation if they perceive a meaningful shift toward sustained fiscal largesse without commensurate shifts in revenue or productivity gains.
For the Bank of Japan, political change complicates a technically steady path toward policy normalization. The BOJ’s mandate mixes price stability with financial system stability, and a new government signalling large-scale fiscal packages could force the BOJ to reassess the timing and communication around reducing JGB holdings. That creates two risks: the BOJ could fall behind needed tightening if inflation pressures rise, or it could be forced into more abrupt action that unsettles markets.
Currency markets are likely to see immediate spillovers. A policy environment expecting looser fiscal policy and a BOJ that keeps rates low typically weakens the yen; a weaker yen would lift exporters’ reported profits but also import costs and headline inflation. International investors will monitor the BOJ and fiscal announcements closely for signs the policy mix is changing — and credit-rating agencies may revisit their assessments if larger deficits look structural rather than cyclical.
Comparison & data
| Metric | Recent value | Relevant benchmark |
|---|---|---|
| 30-year JGB yield | 3.285% | Unprecedented recent high (Sept 2025) |
| 20-year JGB yield | 2.69% | Highest since 1999 |
| Nikkei 225 | 43,018.75 (close, most recent Friday) | Record 43,876.42 on Aug 19, 2025 |
| Japan public debt | ~250% of GDP | Highest among advanced economies |
These figures show how political developments interact with already elevated long-term yields and stretched equity valuations. The large gap between near-term BOJ policy expectations and long-term fiscal risk is what is moving super-long JGB yields most sharply. Investors will compare forthcoming government spending plans against credible funding paths to assess whether recent yield moves reflect temporary positioning or a durable regime shift.
Reactions & quotes
Market and policy figures offered measured, short remarks as events unfolded, reflecting both concern and opportunism among different investor groups.
“A knee‑jerk market response would likely be bear‑steepening in the JGB curve, a softer yen and somewhat higher equity prices as reflationary risks rise.”
Naka Matsuzawa, Nomura Securities (chief macro strategist)
“Super‑long bond yields are under upward pressure from fiscal uncertainty and will probably climb further after the resignation.”
Katsutoshi Inadome, Sumitomo Mitsui Trust Asset Management (senior strategist)
“If Sanae Takaichi becomes leader and pursues more spending, equities would likely benefit while long yields face fresh upward pressure.”
Takamasa Ikeda, GCI Asset Management (senior portfolio manager)
Unconfirmed
- The exact identity and policy platform of the LDP leadership successor remain undecided and will not be final until the emergency vote concludes.
- Whether a successor will immediately deliver a large fiscal package, and its precise size or composition, is not yet confirmed.
- How the BOJ will respond at its September and October meetings to any political signal is uncertain and depends on incoming data and official guidance.
Bottom line
Ishiba’s resignation crystallises a policy uncertainty that markets had been pricing in since July’s upper house results: the possibility of an LDP leadership change that favors more aggressive fiscal stimulus. That scenario tends to be positive for equities in the near term but raises borrowing costs at the long end of the curve, amplifying the risk that sovereign funding costs rise. Investors should watch the emergency LDP vote outcome and the BOJ’s next two meetings for decisive signals on the policy mix.
For policymakers, the trade‑off is managing growth support without destabilising long‑term yields or the currency. For corporate and household borrowers, even modest upward moves in long yields can translate into higher financing costs over time. Market participants should prepare for heightened volatility across JGBs, the yen and Japanese equities in the coming weeks.
Sources
- Reuters – news report on markets and Ishiba resignation (news)
- Bank of Japan – official policy statements and meeting schedule (official)
- Ministry of Finance Japan – budget and debt statistics (official)
- Nomura Securities – market research and strategist commentary (financial firm)
- Sumitomo Mitsui Trust Asset Management – asset management commentary (financial firm)