The currency slipped to its lowest in more than a year against the euro

The yen dropped sharply on Monday following the resignation of Japanese Prime Minister Shigeru Ishiba.

Japan’s Ishiba on Sunday announced his resignation, ushering in a potentially lengthy period of policy uncertainty at a shaky moment for the world’s fourth-largest economy.

The yen plunged in response in Asia trade, and was last down 0.5% against the dollar at 148.16, having pared some losses over the course of the session.

The currency similarly slipped to its lowest in more than a year against the euro and sterling at 173.91 and 200.33, respectively.

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

The probability of an additional rate hike in September was never seen as high to begin with, and September is likely to be a wait-and-see, Hirofumi Suzuki, chief currency strategist at SMBC, said of the BOJ’s next move.

From October onward, however, outcomes will in part depend on the next prime minister, so the situation should remain live, Suzuki said.

On Monday, former Foreign Minister Toshimitsu Motegi became the first ruling party lawmaker to throw his hat into the ring to succeed Ishiba.

Japanese stocks soared while government bonds (JGBs) were steady, though yields on super-long JGBs hovered near record highs.

With the LDP lacking a clear majority, investors will be cautious until a successor is confirmed, keeping volatility elevated across yen, bonds and equities, said Charu Chanana, chief investment strategist at Saxo. Near term, that argues for a softer yen, higher JGB term-premium, and two-way equities until the successor profile is clear.

The yen hardly reacted to Monday’s data, which showed Japan’s economy expanded much faster than initially estimated in the second quarter.