Lawmakers from Japan’s ruling Liberal Democratic Party (LDP) will decide on Monday (Sept 8) whether to call a special leadership election that could remove Prime Minister Shigeru Ishiba, a move with major implications for the world’s fourth-largest economy. Political uncertainty has already shaken markets this week, sending the yen and Japanese government bonds lower, with the 30-year bond yield hitting a record high on Wednesday. While any delay in policymaking could further strain an economy already pressured by U.S. tariffs, investors are more focused on the possibility of Ishiba being replaced by a leader who favors more aggressive fiscal and monetary easing, such as Sanae Takaichi, a critic of the Bank of Japan’s rate hikes.

“The prevailing market expectation is that the LDP will hold a leadership race and Ishiba, a noted fiscal conservative, will lose,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management. “We’re likely to see more selling in Japanese government bonds if his successor pushes for looser fiscal policy.”

Ishiba has resisted calls from within his own party to resign after the LDP’s defeat in July’s upper house election. But his grip on power has weakened: having lost majorities in both houses of parliament, his coalition now relies on opposition support, which has not been forthcoming. Even cabinet ministers are urging a change in leadership.

Party rules stipulate that at least half of LDP lawmakers must demand a leadership contest, which could take place later this month or in October. Such a race would likely delay approval of a supplementary budget designed to help households cope with rising living costs. Analysts at Eurasia Group estimate there is a 60% chance Ishiba will not survive. “His weak record in recent elections, along with former prime minister Taro Aso backing a leadership vote, has shifted momentum against him,” said David Boling, director of Japan and Asian Trade at Eurasia Group.

Attention is now on potential successors. Even though the LDP lacks a parliamentary majority, its leader would still be the frontrunner for prime minister due to opposition fragmentation. The choice could influence both fiscal stimulus levels and the Bank of Japan’s next interest rate move. Contenders include 44-year-old Shinjiro Koizumi, a popular agriculture minister whose economic stance remains unclear, and Sanae Takaichi, a right-wing figure who could become Japan’s first female prime minister. Takaichi, who narrowly lost to Ishiba in a run-off last September, is known for opposing BOJ rate hikes and urging more government spending to support growth.

After ending its massive decade-long stimulus programme last year, the BOJ raised rates to 0.5% in January, expecting inflation to stabilize at 2%. Most economists anticipate another hike this year, possibly in October. “If Takaichi takes over, fiscal restraint will disappear,” said Inadome. “Markets remember the turmoil her candidacy caused last September, which triggered heavy selling of government bonds.”