Japan PM Resignation Spurs Yen Drop, BOJ Rate Hike Uncertainty

The resignation of Japanese Prime Minister Shigeru Ishiba has introduced uncertainty into Japan's monetary policy, with the Liberal Democratic Party's upcoming leadership race in October seen as pivotal for the Bank of Japan's (BOJ) approach to interest rates. Ishiba, a fiscal hawk who supported gradual BOJ rate hikes, stepped down after election losses, causing the yen to weaken and bond yields to drop, while market expectations for an October rate hike have fallen sharply. Potential successors include Sanae Takaichi, favoring fiscal stimulus and opposing aggressive rate hikes, and Shinjiro Koizumi, with unclear monetary views; however, political fragmentation may delay any monetary tightening despite inflation remaining above the BOJ's 2% target. LDP lawmaker Kono Taro has urged the BOJ to raise rates promptly to support the yen and curb inflation, warning that delays could worsen inflation and increase import costs. Despite political uncertainty, the yen has strengthened against the US dollar, supported by positive domestic macroeconomic data and dovish Federal Reserve expectations, although the BOJ may hold off on hikes until political clarity improves. The overall outlook suggests a cautious BOJ balancing act amid political turbulence, inflation pressures, and potential fiscal spending demands that could complicate Japan's path to policy normalization.