Japanese prime minister Yukio Hatoyama said today he and his powerful party number two would resign after a slide in the polls threatened their party's chances in an election expected next month.
The yen fell today after the resignation, particularly as Mr Hatoyama's likely successor has in the past taken a tougher stance in fighting the currency's strength.
The yen earlier sank to a two-week low against the dollar after Mr Hatoyama became the fourth Japanese leader to leave office in a year or less, with some investors worried that political instability would make Japan's weak economy more dependent on the Bank of Japan's easy monetary policy.
Calls built up in Mr Hatoyama's Democratic Party of Japan (DPJ) for him to step down to revive the party's fortunes ahead of an election for the upper house of parliament expected on July 11th that it must win to smooth policymaking.
With tears in his eyes, Mr Hatoyama told party lawmakers that he and party secretary-general Ichiro Ozawa would resign.
"In order to revitalise our party, we need to bring back a thoroughly clean Democratic Party. I would like to ask your cooperation," he said.
The prime minister's ratings slid on voter doubts about his leadership, while the old-style image of Mr Ozawa, seen as pulling strings behind the scene, had also eroded public support.
Analysts have tipped outspoken finance minister Naoto Kan as the frontrunner to replace Mr Hatoyama, who quits after just eight months on the job. A new leader will be chosen on Friday, a party official said.
Mr Kan has in the past pressed the Bank of Japan to do more to fight deflation and has sounded more positive than Mr Hatoyama about raising the 5 per cent sales tax in the future to fund bulging social welfare costs. That stance would be welcomed by investors worried about Japan's huge public debt, which is nearly 200 per cent of GDP.
He surprised markets earlier this year by saying he wanted the yen to weaken more and that most businesses favoured a dollar/yen rate around 95 yen. Since then he has mostly toed the ministry line that stable currencies are desirable and markets should set foreign exchange levels.
The latest political turmoil, including the departure of a tiny leftist party from the ruling coalition, has distracted the government as it thrashes out a plan to cut huge public debt and a strategy to engineer growth despite a fast-ageing population.
The Democrats swept to power last August after a landslide election win for parliament's powerful lower house, ousting the conservative Liberal Democratic Party after more than 50 years of almost non-stop rule.
But doubts over Mr Hatoyama's leadership skills have eroded the government's approval ratings, with one poll showing support at just 17 per cent after he failed to keep a campaign pledge to move a US airbase off Okinawa island in southern Japan.
Reuters