Nikkei falls after leader resigns

Check the Nikkei 225 index

Japanese shares fell after the shock resignation of Prime Minister Shinzo Abe raised concerns about who will replace him and lead the government.

After a session of volatile trading, Tokyo's main Nikkei 225 stock index closed 0.5% lower at 15,797.6.

However, some analysts said that Mr Abe's departure may help shares in the long run as it will ease the political deadlock that has hampered reform.

Bonds gained on the news, and the yen strengthened against the US dollar.

Mixed outcome

Hiroyuki Fukunaga, chief strategist at Rakuten Securities, said that even though a lot of negative factors have been eliminated, "until the next prime minister is named, political uncertainty will weigh on the market".

One of the main concerns is that key decisions relating to the "budget deficit and the possibility of a consumption tax hike will be up in the air for a while", said Norihiro Fujito of Mitsubishi UFJ Securities.

"This is absolutely negative to the stock market," he added.

At the same time, worries over the impact of a global credit crisis triggered by problems in the US sub-prime mortgage market - which caters to people with poor credit histories - will also hamper a rebound in share prices.

"Tokyo shares will probably have to go through a double whammy of the resignation news and the US sub-prime woes for a while," explained Hiroaki Kuramochi of Bear Stearns in Tokyo.

Confidence slump

Mr Abe stepped down amid growing calls for his resignation from within his own party, the Liberal Democrats.

Despite taking over as prime minister a year ago with an aggressive reform agenda, a number of embarrassing scandals involving several of his cabinet ministers tarnished Mr Abe's leadership credentials.

A crucial blow came when his party, the Liberal Democrats, lost control of the upper house of parliament in July for the first time ever, enabling the opposition Democratic Party of Japan to block bills.

Having the unpopular Abe leave is a relief to the market Takahiko Murai of Nozomi Securities

"There was concern about what might happen in parliament under Abe, whether he could get policies enacted," said Yumi Nishimura of Daiwa Securities SMBC.

In an attempt to shore up support for his government, Mr Abe reshuffled his cabinet bringing back a number of the old guard who served under former prime minister Junichiro Koizumi.

But less appetite for change among these traditionalist stalwarts was yet another obstacle for Mr Abe.

"Having the unpopular Abe leave is a relief to the market," said Takahiko Murai of Nozomi Securities.

"But this will not have as much of an impact as if a person directly connected with economic policy were to quit, like the Bank of Japan head," he added.