This resignation continues Japan’s cycle of short-lived leadership since Shinzo Abe.

Prime Minister Shigeru Ishiba announced his resignation after just eleven months in office, taking responsibility for the ruling coalition’s defeats in both the lower and upper house elections. His position had been further undermined by persistent inflation, and the imposition of reciprocal U.S. tariffs under President Trump. Although Ishiba initially argued for stability in navigating the trade deal, internal pressure within the Liberal Democratic Party (LDP) became decisive, with senior figures pushing for an early leadership contest.

This resignation continues Japan’s cycle of short-lived leadership since Shinzo Abe. The LDP will now hold a leadership election, with candidates such as Sanae Takaichi (Minister of State for Economic Security), Shinjiro Koizumi (Minister of Agriculture, Forestry, and Fisheries), and Yoshimasa Hayashi (Chief Cabinet Secretary) in contention. The eventual outcome will determine whether policy moves in a more hawkish, expansionary direction or remains closer to Ishiba’s cautious style.

Ishiba’s departure raises expectations of more expansionary fiscal and monetary policies, which is already weighing on Japanese government bonds and the yen. Further fiscal stimulus, aimed at restoring confidence in the domestic economy, is anticipated. While this environment may benefit equity markets, particularly domestically focused sectors such as infrastructure, construction, and consumer cyclicals, exporters remain vulnerable to U.S. tariffs and exchange rate volatility.

The agreement with Washington reduces immediate trade uncertainty but does not eliminate longer-term risks. A hawkish successor could align Japan more firmly with U.S. security and foreign policy priorities, creating new complexities in regional relations.

Against this backdrop, businesses whose earnings are relatively insulated from global macro swings and which benefit from domestic reform tailwinds could benefit. Sectors like construction, financials, industrials and utilities have relatively limited sensitivity to US tariff outcomes and enjoy steady pricing power as labour shortages, digitalisation and infrastructure demand drive order books. As we head towards the FY25 interim results season, it is important to remain focused on company fundamentals.

By Min Zeng, Portfolio Manager

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