SINGAPORE: The yen has stabilized after investors digested the shock resignation of Japanese Prime Minister Shigeru Ishiba. This development raised doubts about Japan's policy outlook just as signs of weakness in the U.S. economy already unsettled markets.

Ishiba's departure, announced Sunday, ushers in a potentially prolonged period of political uncertainty for the world's fourth-largest economy. In Asia trade, the yen fell 0.6 percent against the dollar to 148.25 and dropped to its weakest in more than a year against the euro and sterling, at 173.91 and 200.33, respectively.

While remaining weaker against the pound and the euro, the yen strengthened on Tuesday, to last trade in Tokyo at 147.20.

Traders are watching closely to see whether Ishiba will be replaced by an advocate of looser fiscal and monetary policy, such as Liberal Democratic Party (LDP) veteran Sanae Takaichi, who has criticized the Bank of Japan's recent 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," said Hirofumi Suzuki, chief currency strategist at SMBC. "From October onward, however, outcomes will in part depend on the next prime minister, so the situation should remain live."

Political instability has already weighed on markets. A selloff last week sent Japan's 30-year government bond yield to a record high. "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."

Kyodo reported that former foreign minister Toshimitsu Motegi intends to run in the race to decide the next LDP leader. Domestic data showing stronger-than-expected second-quarter economic growth barely moved the yen.

Meanwhile, attention in Europe is fixed on French Prime Minister Francois Bayrou, who faces a confidence vote he is expected to lose, potentially plunging the euro zone's second-largest economy deeper into political crisis.

The dollar, which plunged late last week on signs of U.S. economic strain, clawed back some ground, helped by yen weakness. However this was short-lived. Friday's nonfarm payrolls report showed U.S. job growth slowed sharply in August, with just 22,000 jobs added, while unemployment rose to 4.3 percent, its highest in nearly four years.

Investors boosted bets of aggressive easing by the Federal Reserve, with markets now pricing an 8 percent chance of a 50-basis-point cut later this month, according to the CME FedWatch tool. Barclays economists said: "Given the more elevated downside risks to the employment side of the mandate, we think a rate cut at the September meeting is all but assured. We continue to expect a 25bp cut … However, we change our Fed call by adding another 25bp cut in October, while leaving our December cut unchanged."

The dollar index steadied after a sharp drop over the weekend. The Australian dollar edged higher to be last trading in Sydney on Tuesday at 0.6606. 

In Washington, U.S. Treasury Secretary Scott Bessent said late last week that the Trump administration wants to intensify scrutiny of the Fed, including its authority to set interest rates. President Trump is also weighing three finalists to replace Fed Chair Jerome Powell, whom he has criticized all year for not cutting rates as aggressively as he demanded.