07:27 AM EDT, 09/08/2025 (MT Newswires) -- The yen (JPY) has quickly given back all of its initial nonfarm payrolls (NFP) gains against the US dollar (USD) at the start of this week, following Prime Minister Shigeru Ishiba's resignation over the weekend, which has heightened political uncertainty in Japan, said MUFG.

USD/JPY tracked short-term U.S. yields lower and hit a low of 146.82 late Friday, but has since risen back above the 148.00 level, wrote the bank in a note to clients.

The LDP was set to hold a vote on Monday on whether to hold an early leadership contest, but Prime Minister Ishiba decided to resign in advance after holding talks with Agriculture Minister Shinjiro Koizumi and former Prime Minister Yoshihide Suga. Prime Minister Ishiba stated that "having seen the US trade negotiations through, I felt that now is the right time to stand down and give way to my successor." Ishiba plans to stay on as prime minister until his successor takes over.

The LDP will now discuss how to choose a new leader. Bloomberg is reporting that the LDP will hold a meeting on Tuesday to discuss whether to hold a simplified election that could be held within two to three weeks or a full-scale election including party members outside of the Diet that would take about a month to organize, pointed out MUFG.

With political uncertainty in Japan set to persist at least into early October, it will dampen market expectations for the Bank of Japan to resume rate hikes a soon as at the October policy meeting, stated MUFG. There are now only 5bps of rate hikes priced in for the October policy meeting compared with 13bps over a week ago, which is putting a dampener on yen performance in the near-term.

Market attention will now switch to who the likely candidates to replace Prime Minister Ishiba are, added the bank. The media has reported several names as potential successors, including Agriculture Minister Koizumi, former Minister for Economic Security Sanae Takaichi, Chief Cabinet Secretary Yoshimasa Hayashi, former Minister for Economic Security Takayuki Kobayashi and former LDP Secretary General Toshimitsu Motegi.

Each potential candidate will need support from at least 20 other members of parliament to enter the leadership contest. MUFG noted that Takaichi may face a harder task to reach 20 endorsements, given that nine out of her 20 endorsers from the last election have since lost their seats in parliament.