Japan’s Revolving Door Premiership Spins Again

Editors’ note: MarketMinder is nonpartisan, preferring no party nor any politician, and covers politics solely to assess its potential market implications.

Japanese Prime Minister Shigeru Ishiba resigned on Sunday, about a year after he assumed the role. Thus, Japan’s rapid rotation of premiers since the late Shinzo Abe left office in 2020 continued. For markets, it was anything but shocking.

Out of the gate last year, Ishiba lost his Liberal Democratic Party’s (LDP’s) lower-house majority after he called snap elections attempting to consolidate power. Since then, Japan has had a minority government, with speculation swirling throughout his time would be up before too long if he couldn’t pull his—and the LDP’s—popularity up.

So when the LDP lost its upper-house majority in July—the first time the LDP was ever relegated to a minority in both chambers—the writing appeared to be on the wall for Ishiba. It seemed just a matter of when he would step down ... not if. Most political observers thought it would come after securing a US-Japan trade deal. In that way, it looks like Ishiba’s resignation went according to script, considering he and US President Donald Trump agreed on the deal’s loose ends—notably, lowering auto tariffs to 15%—last Thursday.

Next up: The LDP will hold a party leadership contest on October 4. The winner will assume Japan’s premiership—replaying 2024, when Ishiba’s predecessor Fumio Kishida resigned following fallout from a political fundraising scandal the LDP has yet to recover from. Frontrunners to take Ishiba’s post include former Economic Security Ministers Sanae Takaichi (2024’s runner-up) and Takayuki Kobayashi, Agriculture, Forestry and Fisheries Minister Shinjiro Koizumi, Chief Cabinet Secretary Yoshimasa Hayashi and former LDP Secretary General Toshimitsu Motegi—all well-known names who ran in last year’s leadership election. While the horserace over Ishiba’s replacement generates headlines (alongside fun facts like Takaichi’s adventures as a drummer in a heavy metal band), markets are more interested in their policies instead of their personalities—and under any LDP leadership, policies likely differ more in emphasis than kind.

Once the LDP leader is decided, focus likely turns to whether they call a snap election. That is what Ishiba did, and it didn’t go well. With polling showing the LDP sagging, we suspect the new party leader/Japanese prime minister will focus on rebuilding the LDP’s popularity before the next general election, due by October 2028. If so, gridlock likely reigns for the foreseeable future. An LDP-minority government isn’t in a position to accomplish much regardless of its rotating cast up top.

Most importantly for investors, an extension of Japan’s political status quo doesn’t appear to be an impediment for Japanese stocks, which have been scaling new highs. This may seem like a disconnect, especially with recent economic weakness apparently weighing on the public’s distrust of government and contributing to “political instability,” per pundits.^[i] For example, the latest Japanese monthly data before Ishiba’s resignation showed industrial production and retail sales each drop -1.6% m/m in July, missing expectations.^[ii] That didn’t do the LDP any favors, coming alongside widespread popular disenchantment over living costs.

But, to us, this hides a more bullish reality. For one, a minority government suggests no extreme legislation on the horizon—which is positive for stocks. Active legislatures are more likely to upset markets, since radically rearranging regulations or property rights raises uncertainty, making it difficult for businesses to plan and invest. Look, we understand Japan could benefit from some reform targeting things like rigid labor laws. But this presumes an active government targets only the ideal reforms for markets and nothing negative, like picking winners and losers or shifting rules that may affect long-term investment. Besides, Japanese stocks have done fine lately even without major reforms.

As for economic data, they are backward looking, while stocks look forward. Moreover, although monthly series like industrial production and retail sales are timelier than late-lagging quarterly GDP reports, they are less comprehensive—providing only parts of the picture, not the whole shebang. And all are subject to revision.

That last point was particularly instructive Monday. While Q2 GDP is way in the rearview mirror at this point, Japan’s Cabinet Office more than doubled its initial 1.0% annualized growth estimate to 2.2%.^[iii] Now, the revisions were mixed under the hood. Most relevant to us: Household consumption growth rate’s tripling to 1.5% annualized from 0.5% and business investment growth almost halving to 2.6% from 5.5%.

For investors, we think this is more broadly illuminating. Early in Q2, when Liberation Day fears ran wild, many presumed growth in export-heavy Japan would be hit hard. Yet stocks pre-priced this and moved on, soaring after the tariff pause kicked off a chain of events that rendered tariffs milder than feared. Markets anticipated ongoing growth—well before official data releases (and revisions) subsequently confirmed it. In the same way, we think stocks are looking through supposed early-Q3 weakness—and current political uncertainty—spying a brighter future than many expect today.

Exhibit 1: Japan’s GDP Doesn’t Dictate Its Stocks’ Direction

Source: FactSet, as of 9/9/2025. MSCI Japan returns with gross dividends in yen, 12/31/2019 – 9/8/2025, and Japan GDP, Q1 2020 – Q2 2025. Note: Right-hand side y-axis truncates Q2 2020’s GDP decline, which fell -27.1% annualized.