Japan PM Ishiba resigns after bruising election losses

By Yuka Obayashi, Nobuhiro Kubo and Leika Kihara

TOKYO (Reuters) -Japanese Prime Minister Shigeru Ishiba resigned on Sunday, ushering in a potentially lengthy period of policy uncertainty at a shaky moment for the world's fourth-largest economy.

Having just ironed out final details of a trade deal with the United States to lower President Donald Trump's punishing tariffs, Ishiba, 68, told a press conference he must take responsibility for a series of bruising election losses.

Since coming to power less than a year ago, the unlikely premier has overseen his ruling coalition lose its majorities in elections for both houses of parliament amid voter anger over rising living costs.

He instructed his Liberal Democratic Party - which has ruled Japan for almost all of the post-war period - to hold an emergency leadership race, adding he would continue his duties until his successor was elected.

"With Japan having signed the trade agreement and the president having signed the executive order, we have passed a key hurdle," Ishiba said, his voice seeming to catch with emotion. "I would like to pass the baton to the next generation."

Ishiba has faced calls to resign since the latest of those losses in an election for the upper house in July. The LDP had been scheduled to hold a vote on whether to hold an extraordinary leadership election on Monday.

KOIZUMI, TAKAICHI AMONG POSSIBLE SUCCESSORS

Concern over political uncertainty prompted a sell-off in Japan's yen currency and its government bonds last week, with the yield on the 30-year bond hitting a record high on Wednesday.

Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy, such as LDP veteran Sanae Takaichi, who has criticised the Bank of Japan's interest rate hikes.

Ishiba narrowly defeated Takaichi in last year's LDP leadership run-off. Shinjiro Koizumi, the telegenic political scion who has gained prominence as Ishiba's farm minister tasked with trying to cap soaring prices, is another possible successor.

"Given the political pressure mounting on Ishiba after the LDP's repeated election losses, his resignation was inevitable," said Kazutaka Maeda, economist at Meiji Yasuda Research Institute.

"As for potential successors, Koizumi and Takaichi are seen as the most likely candidates. While Koizumi is not expected to bring major changes, Takaichi’s stance on expansionary fiscal policy and her cautious approach to interest rate hikes could draw scrutiny from financial markets," Maeda said.

Since the ruling coalition has lost its parliamentary majority, the next LDP president is not guaranteed to become prime minister, although that is likely as the party remains by far the largest in the lower house.

Whoever becomes the next leader may choose to call a snap election to seek a mandate, analysts said. While Japan's opposition remains fractured, the far-right, anti-immigration Sanseito party made big gains in July's upper house election, bringing once-fringe ideas into the political mainstream.

Nearly 55% of respondents to a poll by Kyodo news agency published on Sunday said there was no need to hold an early election.

Michael Brown, senior research strategist at financial markets brokerage Pepperstone, said there was likely to be further selling pressure on the yen and long-dated bonds on Monday.

"That selling pressure is likely to come first from the market now needing to price a greater degree of political risk, not only in terms of the LDP leadership contest, but also the potential for a general election to be held if the new leader seeks a mandate of their own," Brown said.

'NO TIME TO LOSE'

Ishiba, a party outsider who became leader on his fifth attempt last September, wrapped up his brief tenure by completing the trade deal with Japan's biggest trading partner, pledging $550 billion of investments in return for lower tariffs.

Trump's tariffs, especially those targeted at Japan's critical automotive sector, had forced Japan to downgrade its already weak growth outlook for the year.

Ishiba said he hoped his successor could ensure the deal is executed and Japan continues generating wage gains to assuage voter concerns over living costs.

He also expressed concern about the security environment his successor will inherit, pointing to an unprecedented gathering of Chinese, Russian and North Korean leaders in Beijing for a massive military parade last week.

Yoshinobu Tsutsui, chairman of Japan's biggest business lobby, Keidanren, said there was "no time to lose" with mounting domestic and international challenges.

"We hope the new leader will foster unity within the party, establish stable political conditions, and move swiftly to implement necessary policies," Tsutsui said.

Some voters too are hoping for a steady hand in uncertain times.

"With all the turmoil around tariffs right now, I hope the next prime minister will be someone who can properly manage the tariff issues and handle diplomacy more effectively," Maki Utsuno, a 48-year-old chemistry researcher, told Reuters outside a busy train station in downtown Tokyo on Sunday.

(Reporting by Yuka Obayashi, Nobuhiro Kubo, Makiko Yamazaki, Leika Kihara and Chang-Ran Kim in Tokyo; Additional reporting by Rae Wee in Singapore; Writing by John Geddie; Editing by William Mallard)