Japan PM hopefuls prepare leadership bids, markets recoil

By Kaori Kaneko and Rocky Swift

TOKYO (Reuters) - Ruling party lawmakers in Japan prepared their bids to replace outgoing premier Shigeru Ishiba on Monday, as financial markets recoiled on the political uncertainty and the possibility of his successors ramping up government spending. 

Ishiba called time on his brief tenure on Sunday, saying he was taking responsibility for bruising elections that saw his ruling coalition lose its majority in both houses of parliament amid voter anger over rising living costs. 

He instructed his Liberal Democratic Party - which has governed Japan for most of its post-war history - to hold an emergency leadership election. The party plans to hold the vote on October 4, an LDP official close to the matter told Reuters.

Japan's yen sank and super long-term bond yields scaled record highs after Ishiba's resignation stoked speculation that policies favoured by potential successors - such as fiscal dove Sanae Takaichi - may strain the world's most indebted advanced economy.

"The LDP is facing its worst crisis since its founding," former foreign minister Toshimitsu Motegi, 69, told reporters on Monday as he announced his plan to stand for the leadership.

"We must unite quickly to tackle our serious challenges at home and abroad and move the country forward."

Chief Cabinet Secretary Yoshimasa Hayashi also intends to run in the election, a source close to the government's top spokesperson told Reuters.

The frontrunners, however, are LDP veteran Takaichi and Shinjiro Koizumi, son of former Prime Minister Junichiro Koizumi, who gained prominence as Ishiba's farm minister tasked with trying to rein in soaring rice prices.

A victory for either would mark milestones for Japan: Takaichi, 64, becoming its first female leader and Koizumi, 44, its youngest in the modern era.

Neither has formally announced their candidacy but they finished second and third respectively in the last leadership contest in September 2024.

"All indications are that it will come down to them facing off against each other," said Jeffrey Hall, a lecturer in Japanese studies at Kanda University of International Studies.

CONSERVATIVE CONTENDER

Of most consequence for investors and Japan's diplomatic relations would be Takaichi, who has held a number of posts including as economic security and internal affairs ministers. 

She stands out for her opposition to the Bank of Japan's interest rate hikes and her calls to ramp up spending to boost the fragile economy. 

Investors are betting the political hiatus alone will delay the BOJ's monetary policy tightening plans.

Money markets are now pricing in a roughly 20% chance of the BOJ hiking rates by the end of October, down from 46% a week ago.

The expected leadership bid of the nationalistic Takaichi will also be closely watched by Japan's powerful neighbour China. 

Known for conservative positions such as revising the pacifist constitution, Takaichi is a regular visitor to the Yasukuni shrine to honour Japan's war dead, viewed by Beijing and others as a symbol of past militarism. 

Takaichi earlier this year also visited Taiwan, the democratic island claimed by China, where she suggested Taiwan, Japan and other partners could form a "quasi-security alliance".

"China might take a more hostile stance towards Japan, because she depicts herself as very much a hawk regarding China," said Hall of Kanda University.

(Reporting by Kaori Kaneko, Rocky Swift, Kantaro Komiya, Yoshifumi Takemoto and Tom Bateman; Writing by John Geddie; Editing by Chang-Ran Kim, Stephen Coates and Ros Russell)