Prime Minister Ishiba Shigeru’s resignation announcement on September 7, after less than a year in office, places Japan at a political and economic crossroads. Ishiba stepped down after two consecutive election setbacks for the Liberal Democratic Party (LDP) in both houses of the Diet.
In the polls, rising food costs have emerged as a pressing concern for voters. As of May 2025, consumer prices excluding fresh food were up 3.5 percent, and rice prices had more than doubled from a year earlier. The LDP’s next leader will thus face the urgent task of containing inflation, which has remained above the Bank of Japan (BOJ)’s 2 percent target for three years. Addressing food prices – especially rice prices – has become a rallying point for both the party and the electorate.
During his brief tenure, Ishiba advanced what is informally known as “Ishibanomics,” blending fiscal discipline with targeted investment. He pledged to raise the minimum wage to 1,500 yen per hour by the end of 2029 and promoted fairer taxation by increasing levies on financial income. In November 2024, he unveiled a 10 trillion yen ($65 billion) program to aid semiconductor and AI companies, including Rapidus. In May 2025, he backed a 60 trillion yen five-year initiative to boost small and medium enterprise (SME) productivity.
In August 2025, he announced measures to boost rice harvests in the face of production shortages and rising prices. However, his government struggled to reform Japan’s long-standing agricultural policies, used to secure farmers’ political loyalty. These protections keep domestic production limited and tariffs high.
Responding to U.S. tariffs, Ishiba introduced an emergency relief package in April 2025 with fuel and electricity subsidies, financed via reserve funds to safeguard fiscal stability. He also proposed a 20,000 yen cash handout for all residents to alleviate financial pressures from rising inflation, but faced criticism for its potential impact on Japan’s already high fiscal deficit.
In September 2025, Ishiba secured a preliminary deal to reduce U.S. tariffs on Japanese automobiles and other goods from the previous 25 percent to 15 percent. He cited the successful conclusion of the Japan-U.S. tariff negotiations as one reason for stepping down.
The upcoming leadership transition is rattling financial markets. Investors, weighing political uncertainties and the prospects of potential successors, have pushed down short-dated bond yields and weakened the yen. The drop in short-term yields probably reflects lower expectations on a BOJ rate hike. Money markets now assign about a 22 percent chance of a BOJ rate hike by the end of this year, down from 46 percent a week earlier.
Two of the frontrunners at the moment are former economic security minister Takaichi Sanae and current Agriculture Minister Koizumi Shinjiro – both top candidates in the last LDP leadership race in September 2024. Takaichi is an advocate of “Abenomics,” named for the late former prime minister Abe Shinzo. Abenomics favors government stimulus and monetary easing, and Takaichi has openly criticized the BOJ’s rate hikes. The monetary stance of the fresh-faced Koizumi, however, remains less defined.
The LDP leadership election, which will choose Ishiba’s successor, is set for October 4. The successor will be elected by all 295 LDP lawmakers together with rank-and-file party members, whose ballots will be converted into another 295 votes. The period between the leadership election and the BOJ’s policy meeting on October 29-30 could create a political vacuum, heightening risks for the central bank’s deliberations.
A return to the pre-Abe Shinzo norm of revolving-door prime ministers, which dominated the 1990s and late 2000s, probably would give an additional boost to populist pressure to expand fiscal spending. Yet Japan’s government debt burden remains a concern. The draft budget already allocates 32.4 trillion yen just to finance debt, and yields on super-long government bonds spiked to historical highs. The rise in long-term yields probably highlights concerns over heavier borrowing and larger deficits.
Whoever wins the LDP election on October 4 – whether Takaichi, Koizumi, or another contender – Japan’s next leader will likely restrain any push for low rates in order to address concerns about inflation in the public while accommodating other members in the LDP and parties who advocate for cautious monetary policy. For example, Kamiya Sohei, leader of the rising opposition party Sanseito, has urged the BOJ to delay raising interest rates until the economy shows clearer signs of recovery.
To sum, the next prime minister will face a delicate balancing act: taming inflationary pressures and debt burdens while steering through a politically fragile landscape with little room to maneuver, dependent on support from both party factions and opposition parties to pass budgets in a minority government.