Volatility risks rise in Japan with the exit of PM Ishiba

Japanese markets face the prospect of more instability as investors prepare for the departure of Prime Minister Shigeru Ishiba and the guessing game of who comes next.

The yen is likely to come under pressure when trading opens around 4 a.m. Tokyo time Monday, after being among the weakest of its Group of 10 peers last week. Long-maturity Japanese sovereign bonds stand out as being particularly vulnerable to selling when that market gets underway later in the morning, given heightened concerns over government spending. Stocks are exposed to cross currents that make choppy moves likely.

Although expectations for Ishiba's eventual departure have been present following his ruling party's poor election showing in July, traders are still trying to determine how much fiscal stimulus may come with potential successors, and to what degree any change could slow the next interest rate hike from the Bank of Japan.

"While it remains unclear who will become the next prime minister, it's difficult to envision anyone with a fiscal discipline stance better than or even equivalent to his," said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management in Tokyo. "The weak performance of ultra-long-term bonds, driven by fiscal concerns, is likely to persist or even intensify."

Any further spike in JGB yields would be of concern to global markets, which have been on guard for more spillover from Japan into debt trading in Europe and the US. Long-end yields have been rising on renewed fiscal concerns across major economies.