Not so long ago a change of leadership in Tokyo was regarded by the post-war world as mainly an internal Japanese affair. But coming in the midst of the worst Asian financial crisis in half a century, the resignation of the Prime Minister, Mr Ryutaro Hashimoto, yesterday, sent waves of concern across the troubled region.
Mr Hashimoto told a news conference he was quitting after his Liberal Democratic Party (LDP) retained only 44 of its 61 seats in the 252-member Upper House in elections on Sunday.
"Our failure in the election is my fault and responsibility," Mr Hashimoto said. Markets throughout Asia watched anxiously as Tokyo stocks went on a wild ride over the political uncertainty in the world's second-largest economy.
The yen and the Tokyo stock market first fell sharply but by the end of the day both recovered on hopes that Mr Hashimoto's fate at the hands of discontented voters would spur his successor to make rapid economic reforms to take Japan out of recession. But elsewhere share values fell as investors fretted that Tokyo's reform programme would stall.
Commentators said, however, that the rejection of the LDP suggested the electorate wanted a new leadership and more aggressive policies to deal with a seven-year economic slowdown that has pushed unemployment and bankruptcies to record levels.
The LDP retains control of the Lower House and has launched a hurried search for a new leader to calm world worries about a political vacuum.
The favourites are the Foreign Minister, Mr Keizo Obuchi, a former prime minister, Mr Kiichi Miyazawa, and Mr Seiroku Kajiyama, a former chief cabinet secretary.
Usually the selection process takes a month but the party decision will be made by deputies on July 21st. Mr Hashimoto, who was 2 1/2 years in office, will remain until the winner is installed as prime minister a week later at a special parliamentary session.
The new prime minister will be urged by other world leaders to make deeper and permanent tax cuts and take more aggressive financial measures to stimulate growth in the Japanese economy. Given the level of voter anger at the bungled attempts at reform by Mr Hashimoto's cabinet, the incoming leader may be emboldened to accelerate plans to wind up failed banks while extending credit to fundamentally sound borrowers.
The European Commission signalled its concern yesterday that economic reforms should continue in Japan regardless of who replaces Mr Hashimoto.
Momentum for economic and financial reform "must not be allowed to stall" said a spokesman for the EU Trade Commissioner, Sir Leon Brittan, who also called for permanent tax cuts to stimulate spending.
One of the main reasons for the Japanese recession is the reluctance of Japanese people to spend money in the uncertain economic climate.
The call for urgent economic measures came as data was released in Brussels showing that the EU's trade deficit with Japan widened sharply in the first quarter of 1998, as Asian exports to Europe rose due to the weakness of Asian currencies and EU exports to Japan fell for the same reason.
Meanwhile, with the yen slipping back to the levels where US-led intervention occurred last month, the country is rudderless, something which deeply concerns the Chinese government - which is struggling to maintain its currency at its present levels despite the waves of competitive devaluations in recent months.
Chinese economists warned yesterday that renewed weakness of the yen would put further pressure on China to devalue.
"China's exports are facing grimmer prospects in the second half compared with the first half," Mr Zhao Jinping of the State Council's Development Research Centre said.
The Asian financial crisis has hit China's overseas sales, with growth in exports falling from 26 per cent to 7.6 per cent in the first six months of this year.
"If the yen hovers around 140 against the dollar, China's exports to Japan would be cut by 6 to 7 per cent this year, or a decline of $2 billion," he said.
The yen has hovered above 140 to the US dollar for several days. Yesterday, it sank to 144.5 before recovering to 142.47.
Meanwhile, Mr Hashimoto has had to cancel vitally important trips to France and the United States. He was to leave for Paris on July 19th and to arrive in Washington on July 21st to brief President Clinton on measures he had planned to revive Japan's recession-hit economy.
"I can't go ahead when I'm resigning," Mr Hashimoto said. "I am calling off the trip."
Russia too is watching developments in Japan closely. Mr Hashimoto and President Yeltsin of Russia restored good relations between the two powers last November for the first time in a century.
Mr Sergei Kiriyenko arrived in Tokyo yesterday as the first Russian prime minister ever to visit the Japanese capital. He plans to conduct political and economic talks vital to Russia's economic recovery.
Mr Hashimoto insisted at his press conference that "regardless of my resignation, Japan-Russia relations must progress, it is something we must do".
Mr Hashimoto and Mr Yeltsin agreed last November to expand trade and complete a peace treaty by the year 2000 to formally end second World War hostilities.
A long-standing dispute over four islands north of the Japanese island of Hokkaido has been the main obstacle to a peace treaty.
In Indonesia, the news of the Japanese political crisis brought forth a stark warning of regional instability.
Indonesia's economic and finance minister, Mr Ginandjar Kartasasmita, said a Japanese political vacuum could cause uncertainty in Asia.
"The vacuum itself may indirectly have some effect on us in the sense that, for instance, it has already affected the exchange rate of the yen, and depreciation of the yen will hurt us," he said.
In all the speculation yesterday, one voice of optimism was heard. The president of the German Bundesbank, Mr Hans Tietmeyer, who is in Tokyo for a conference of central bankers, told a news conference the world's bankers believed Japan would overcome its problems. "We see good chances, looking at the fundamentals and resources of this country, that this can be done and will be done," he said. "The potential of this country should not be underestimated."