The yen and Japanese government bonds briefly weakened after Prime Minister Ishiba’s resignation fueled speculation of a policy shift under potential successor Sanae Takaichi. While Takaichi’s dovish stance and fiscal ambitions grab headlines, analysts warn legislative gridlock limits scope for sweeping changes, BBH FX analysts report.

Takaichi emerges as frontrunner, advocates looser policy

"Japanese Yen (JPY) and JGBs dropped briefly. Japan’s Prime Minister Shigeru Ishiba has resigned as the leader of the ruling Liberal Democratic Party (LDP) on Sunday. The LDP will discuss the date for the leadership contest and the specifics of the vote tomorrow. In the meantime, the market narrative is that a leadership change opens the door to more expansionary fiscal and monetary policy in Japan."

"One reason is that a leading candidate to replace Ishiba as prime minister is Sanae Takaichi. Takaichi opposes Bank of Japan rate hikes and advocates for higher government spending."

"Regardless, whoever is the next prime minister faces deep legislative gridlock as the LDP does not have majorities in both bouse of parliament. LDP contenders may campaign on fiscally profligate pledges but pushing them through parliament will be difficult. We would fade undershoots in JPY and JGBs."